What is the PEG ratio?
The PEG ratio is the price-to-earnings (P/E) ratio divided by the company's expected earnings growth rate. It puts a stock's valuation in the context of how fast profits are growing, so a high P/E backed by rapid growth can look more reasonable than the P/E alone suggests. A PEG near 1 is often considered roughly balanced.
The PEG ratio matters because P/E on its own can be misleading for growing companies. A business trading at 40 times earnings looks expensive next to one at 15, but if the first is growing profits at 40% a year and the second is flat, the pricey-looking one may offer better value for the growth. PEG folds that growth into a single number.
As a rough guide, a PEG below 1 suggests the price may not fully reflect the expected growth, around 1 suggests price and growth are roughly in line, and well above 1 suggests a premium is being paid for that growth. The big caveat: PEG depends entirely on a growth forecast, and forecasts are often wrong, so treat it as a starting point rather than a verdict.
| PEG | What it suggests |
|---|---|
| Below 1 | The price may not fully reflect the expected growth; worth a closer look. |
| Around 1 | Price and expected growth are roughly in balance. |
| Above 1 | A premium is being paid for the expected growth. |
Frequently asked questions
What is a good PEG ratio?
A PEG around 1 is often treated as a rough balance between price and growth, with lower values suggesting more growth for the price. Because it relies on a growth estimate, it is best used alongside other measures rather than as a strict cutoff.
Why can the PEG ratio be unreliable?
It depends on a forecast of future earnings growth, which is uncertain and can be too optimistic. Different sources use different growth periods, so the same stock can show different PEG values. It works best as one input among several.