PEG Ratio Calculator

PEG adjusts the P/E ratio for expected growth.

How the Math Works

The PEG Ratio Calculator applies a straightforward formula: PEG = P/E ÷ growth rate. Here, P/E represents the price-to-earnings ratio, which compares a company's stock price to its earnings per share. The growth rate is the projected annual earnings growth, expressed as a decimal (e.g., 15% becomes 0.15). By dividing P/E by growth, the PEG adjusts for future potential, revealing whether a stock's valuation is justified by its growth prospects. A PEG below 1 suggests undervaluation relative to growth, while a PEG above 1 indicates overvaluation.

Practical Applications

Investors use the PEG Ratio to compare companies across industries or sectors, accounting for differing growth trajectories. For instance, a tech startup with a high P/E but explosive growth might have a PEG similar to a mature utility with a lower P/E and slower growth. This metric helps identify undervalued opportunities by normalizing P/E ratios against expected earnings expansion. However, users should rely on consistent, long-term growth estimates and avoid using volatile or speculative growth projections.

Day-to-Day Use

In daily investment decisions, the PEG Ratio simplifies the evaluation of stock picks by balancing price and growth. It aids in portfolio rebalancing, helping investors shift toward stocks with favorable PEG ratios for better risk-adjusted returns. For example, an investor might use it to compare two pharmaceutical companies: one with a PEG of 0.8 (potentially undervalued) versus another with 1.5 (overvalued). This tool is especially valuable for beginners seeking a disciplined approach to stock analysis beyond superficial P/E comparisons.

Worked example

P/E 20 ÷ 15% growth → 1.33.

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