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RegisterThe Price/Earnings to Growth ratio (PEG) builds on the P/E ratio by factoring in a company's expected earnings growth rate. It is calculated by dividing the P/E ratio by the annual earnings growth rate. A PEG of 1.0 is generally considered fairly valued — below 1.0 may indicate undervaluation relative to growth, above 1.0 may indicate overvaluation.
The P/E ratio alone does not tell you whether a company's valuation is justified by its growth prospects. A company with a P/E of 30 might be cheap if it is growing earnings at 40% per year, but expensive if earnings are flat. The PEG ratio adds this crucial growth dimension to valuation analysis.
A declining PEG ratio over time can indicate that a stock is becoming more attractively valued relative to its growth. A rising PEG suggests the stock may be getting ahead of its fundamentals. Comparing a company's PEG to its historical range and industry peers provides the most useful context.
The PEG ratio is sensitive to changes in both the stock price and earnings growth expectations. Rapid changes in analyst growth forecasts or significant price movements can cause the PEG to shift quickly.