PEG Ratio
Definition
The PEG (Price/Earnings to Growth) ratio adjusts the P/E ratio for the company's expected earnings growth rate. It helps investors compare companies with different growth rates on an equal footing.
P/E Ratio ÷ Earnings Growth Rate (annual %)How to Interpret PEG Ratio
A PEG ratio below 1.0 suggests the stock is undervalued relative to its expected growth. A PEG above 2.0 suggests the market is pricing in optimistic growth expectations that may not materialize. The PEG ratio is most useful for comparing companies within the same industry. It becomes unreliable when growth rates are very high or negative.
Why It Matters for Investors
The PEG ratio helps quality investors avoid overpaying for growth. A fast-growing company can look reasonably valued on a P/E basis but actually be expensive once you account for the growth expectations already priced in. We use PEG as a secondary check after FCF/EV yield.
Frequently Asked Questions
What is a good PEG ratio?
A PEG below 1.0 is attractive, 1.0-1.5 is fair, and above 2.0 suggests the stock may be overvalued relative to its growth prospects.
What are the limitations of the PEG ratio?
PEG relies on estimated future growth, which is often wrong. It also does not account for the quality or durability of growth — temporary growth from a one-time product launch is not the same as sustainable compounding.
Should I use trailing or forward PEG?
Forward PEG uses estimated future growth and is more common, but less reliable. Trailing PEG uses historical growth and is more factual. We prefer trailing PEG as a starting point, then check if forward estimates are realistic.
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