PEG ratio

The PEG ratio (price/earnings to growth ratio) is a valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share (EPS), and the company's expected growth.

In general, the P/E ratio is higher for a company with a higher growth rate. Thus using just the P/E ratio would make high-growth companies appear overvalued relative to others. It is assumed that by dividing the P/E ratio by the earnings growth rate, the resulting ratio is better for comparing companies with different growth rates.

The PEG ratio is considered to be a convenient approximation. It was originally developed by Mario Farina who wrote about it in his 1969 Book, A Beginner's Guide To Successful Investing In The Stock Market. It was later popularized by Peter Lynch, who wrote in his 1989 book One Up on Wall Street that "The P/E ratio of any company that's fairly priced will equal its growth rate", i.e., a fairly valued company will have its PEG equal to 1.

${\displaystyle {\mbox{PEG Ratio}}\,=\,{\frac {\mbox{Price/Earnings}}{\mbox{Annual EPS Growth}}}}$

The growth rate is expressed as a percent value, and should use real growth only, to correct for inflation. E.g. if a company is growing at 30% a year, in real terms, and has a P/E of 30, it would have a PEG of 1.

A lower ratio is "better" (cheaper) and a higher ratio is "worse" (expensive).

The P/E ratio used in the calculation may be projected or trailing, and the annual growth rate may be the expected growth rate for the next year or the next five years.

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