ValueThe PEG formula
The PEG ratio adjusts the familiar price-to-earnings ratio for growth:
PEG = (P/E ratio) / (expected annual earnings growth, in percent)
Example: a $150 stock earning $6 per share trades at a P/E of 25. If you expect earnings to grow 20% a year, the PEG is 25 / 20 = 1.25. The ratio is unitless: it simply tells you how many "P/E points" you are paying per point of expected growth.
Why growth-adjust the P/E
A P/E of 25 is expensive for a company growing 5% a year and cheap for one growing 40% a year, yet the raw P/E shows you the same number in both cases. Dividing by growth normalizes that: the slow grower scores a PEG of 5 (pricey), the fast grower 0.63 (cheap). Growth investors have used this adjustment for decades because price alone never tells you what you are actually buying.
A DCF does the same job more rigorously: instead of compressing growth into a ratio, it prices each year's expected cash flow and discounts it back to today. Try both on the same stock with the DCF calculator and see whether they agree.
What counts as a good PEG
Peter Lynch popularized the rule of thumb that investors still quote: a PEG below 1 is often seen as attractive, around 1 is roughly fair value, and above 1.5 suggests the stock is priced for perfection. Two caveats keep this honest:
- Industry norms differ. High-growth sectors routinely trade above 1, and mature sectors below 1. Compare a stock's PEG to its sector peers, not just to the number 1.
- The quality of growth matters. A PEG below 1 built on one year of unsustainable earnings is a trap, not a bargain. Durable, cash-backed growth deserves a higher multiple than a single lucky year.
Where PEG breaks down
- Growth estimates are guesses. PEG inherits all the error in your growth forecast, and dividing by a small number amplifies it. A PEG built on a shaky estimate is worse than no PEG at all.
- One year vs many years. Analysts usually quote next-year growth, but a stock's value depends on many years of growth. The reverse DCF shows the multi-year growth the price actually demands.
- Negative or zero earnings. Without positive earnings there is no meaningful P/E, so there is no PEG. The calculator refuses to print a number when growth is zero or negative for the same reason.
- Cyclical companies. At a cycle peak, earnings look huge, the P/E looks tiny, and the PEG looks like a steal, right before earnings collapse. Normalize earnings across the cycle first.
- It ignores debt and cash. Two stocks with identical P/Es can hide very different balance sheets. The EV/EBITDA calculator adjusts for debt and is a better cross-company comparison when leverage differs.
Frequently asked questions
What is the PEG ratio?
The price/earnings-to-growth ratio: a stock's P/E ratio divided by its expected annual earnings growth rate, in percent. It asks whether the price you pay is reasonable for the growth you expect. A P/E of 25 with 20% expected growth gives a PEG of 1.25.
What is a good PEG ratio?
Peter Lynch's popular rule of thumb: below 1 is often seen as attractive, around 1 is roughly fair value, and well above 1 suggests the price already assumes a lot of future growth. Treat it as a starting filter, not a buy signal, and remember that norms differ by industry.
Why is PEG better than P/E alone?
A raw P/E ignores growth. A P/E of 30 looks expensive until you learn earnings are growing 40% a year; a P/E of 12 looks cheap until earnings are shrinking. PEG puts the two numbers together so fast growers and slow growers can be compared on the same footing.
Can the PEG ratio be negative?
Mathematically yes, if earnings or expected growth is negative, but a negative PEG has no useful interpretation. This calculator treats zero or negative expected growth as meaningless rather than printing a number.
Does PEG work for unprofitable companies?
No. Without positive earnings there is no meaningful P/E, so there is no PEG. Unprofitable companies are better judged on revenue growth, cash burn, and the path to profitability, or with a DCF once earnings turn positive.
How does PEG relate to DCF?
Both try to answer whether the price is justified by future growth. A DCF models the cash flows year by year and discounts them back to today; PEG compresses the same idea into one ratio. If PEG flags a stock as interesting, a DCF is the natural next step to test the growth story in detail.