The PEG ratio (Price/Earnings To Growth ratio) is a valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share (EPS), and the company’s expected growth.The PEG ratio is considered to be a convenient approximation. It was popularized by Peter Lynch, who wrote in “One Up on Wall Street” that “The P/E ratio of any company that’s fairly priced will equal its growth rate”, i.e. a fairly valued company will have its PEG equal to 1.
Basic formula
A lower ratio is “better” (cheaper) and a higher ratio is “worse” (expensive).
It should be noted that the P/E ratio used in the calculation may be projected or trailing, and the annual growth rate may be the expected growth rate for the next year or the next five years.
- More than 1.0 is poor;
- Less than 1.0 is good;
- Less than 0.5 is excellent.
PEG is a widely used indicator of a stock’s potential value. It is favored by many over the price/earnings ratio because it also accounts for growth. Similar to the P/E ratio, a lower PEG means that the stock is more undervalued.
Keep in mind that the numbers used are projected and, therefore, can be less accurate. Also, there are many variations using earnings from different time periods (i.e. one year vs five year). Be sure to know the exact definition your source is using.
