What Is the PEG Ratio?
The PEG ratio is the P/E ratio divided by the company's expected profit growth. It tells you if a high P/E is backed by fast growth.
How to calculate the PEG ratio
A company has a P/E of 30 and its profit is expected to grow 30% a year. Its PEG is 1. Another company has a P/E of 30 but grows only 10% a year. Its PEG is 3, so you pay much more for each bit of growth.
What is a good PEG ratio?
A common rule of thumb says a PEG around 1 is fair. Below 1 can mean you are paying little for strong growth. Above 2 can mean the price already expects a lot. These are rough guides, not rules.
Is a PEG below 1 always good?
No. The growth number is a forecast, and forecasts are often too hopeful. A low PEG built on growth that never happens is a trap. Also, PEG does not work for companies with no profit, or with shrinking profit.
When PEG is useful
It helps you compare fast growers with slow growers. A fast grower can look expensive on P/E alone but fair on PEG. It works best for companies with steady, predictable EPS growth.
See it in real companies
Open a company to see what it sells and how it makes money.