PEG Ratio Calculator
Key Takeaway
The PEG ratio (P/E divided by earnings growth rate) adjusts valuation for growth. A PEG below 1.0 suggests the stock is undervalued relative to its growth rate , a metric made famous by Peter Lynch.
PEG Ratio Calculator
Calculate Price/Earnings-to-Growth ratio for GARP valuation.
PEG Ratio
1.67
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Price/Earnings-to-Growth (PEG) Ratio Formula
Adjusts Price-to-Earnings valuation metrics by factoring in the company's expected annual earnings growth rate.
Worked Example: Stock with P/E ratio of 30, growing earnings at 15% p.a.
PEG Ratio: Valuation adjusted for company earnings growth
Pooja compared two stocks with a P/E ratio of 30. Stock A's earnings were growing at 15% p.a. (PEG 2.0), while Stock B's earnings were growing at 30% p.a. (PEG 1.0).
Even though both had the same P/E ratio, Stock B was a much more attractive buy because its growth adjusted PEG was 1.0 compared to Stock A's PEG of 2.0.
The PEG ratio adjusts Price-to-Earnings metrics by dividing them by the company's expected annual earnings growth rate.
A PEG ratio under 1.0 indicates a stock is undervalued relative to its growth, while a ratio above 2.0 suggests growth is premium priced.
Frequently Asked Questions
What is the PEG Ratio?
The Price/Earnings-to-Growth (PEG) ratio is a valuation metric that determines the relative trade-off between the price of a stock, the earnings generated per share, and the company's expected growth.
What does a PEG ratio below 1.0 indicate?
A PEG ratio below 1.0 generally suggests that a stock is undervalued given its expected earnings growth, making it an attractive prospect for GARP (Growth at a Reasonable Price) investors.
Why use PEG instead of just P/E?
P/E ratios can make fast-growing tech companies look extremely expensive. The PEG ratio factors in that growth rate, providing a more balanced view of valuation.
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