How the PEG ratio puts a P/E in context
A price-to-earnings ratio tells you how much you are paying for a dollar of today’s earnings, but it is silent on growth — and growth is often the whole reason a multiple is high. The PEG ratio fixes that by dividing the P/E by the expected annual earnings growth rate, so a richly valued fast grower and a cheaply valued slow grower can be compared on a more even footing. A PEG near 1.0 is often read as the multiple and the growth being roughly in balance; well below 1.0 hints the growth may be under-appreciated, and well above 1.0 that it is already in the price. Because the ratio leans entirely on a forward growth estimate, it is best treated as a lens, not a verdict. This calculator can sit alongside ourP/E ratio calculatorfor the multiple itself, and thedividend discount modelwhen income matters more than growth.
The PEG ratio formula
PEG = (P/E) ÷ Annual EPS growth %
P/E = Price per share ÷ Earnings per share
where the growth % is entered as a plain number (a 30% growth rate is used as 30, not 0.30), so a 30× P/E divided by 30 gives a PEG of 1.0. The growth figure is normally a forward estimate of annual EPS growth; the resulting PEG is only as reliable as that estimate.
What makes this calculator different
- It computes the P/E and the PEG together. Enter price, earnings, and a growth rate and you get both the multiple and the growth-adjusted ratio in one place, so you can see how the two relate.
- A plain-English over- or under-priced read. Instead of leaving you with a bare number, it frames the result around the PEG≈1 rule of thumb — cheap, fair, or expensive relative to growth.
- Honest about the growth-estimate dependency. The whole ratio hinges on the growth rate you supply, and the calculator is built to make that assumption visible rather than hide it behind a single confident-looking figure.
Frequently asked questions
What is the PEG ratio and how is it calculated?+
The PEG ratio — price/earnings-to-growth — divides a stock’s price-to-earnings (P/E) multiple by its expected annual earnings growth rate, expressed as a percentage. The formula is simply PEG = (P/E) ÷ Annual EPS growth %. So a stock on a 30× P/E that is expected to grow earnings 30% a year has a PEG of 1.0. It is designed to answer a question P/E alone cannot: is this multiple expensive or cheap relative to how fast the company is growing?
What is a good PEG ratio?+
The common rule of thumb, popularised by fund manager Peter Lynch, is that a PEG of around 1.0 suggests a stock is fairly priced, below 1.0 hints it may be undervalued, and above 1.0 that the growth is already priced in or the stock is expensive. Treat this as a heuristic, not a hard rule. A high-quality, low-risk compounder can deserve a PEG above 1.0, while a cyclical or risky business might be a poor buy even below 1.0. The number is a starting point for analysis, not a verdict.
Why is the PEG ratio better than the P/E ratio alone?+
The P/E ratio tells you what you pay for a dollar of current earnings, but it says nothing about how fast those earnings are growing. A 10× P/E looks cheap and a 40× P/E looks expensive — until you learn the first company is shrinking and the second is doubling earnings every couple of years. The PEG ratio adjusts the multiple for growth, putting a high P/E in context, so it lets you compare fast growers and slow growers on a more even footing.
What growth rate should I use in the PEG ratio?+
Most analysts use a forward estimate of annual EPS growth — typically a projected one-to-five-year rate — rather than backward-looking historical growth, since the PEG is meant to be forward-looking. The catch is that the answer is only as good as the estimate you feed in: growth forecasts are uncertain, and small changes to the rate move the PEG substantially. Use a realistic, defensible figure, and consider testing a range of growth assumptions rather than relying on a single optimistic number.
What are the limitations of the PEG ratio?+
The PEG ratio is highly sensitive to the growth assumption, which is itself a forecast — change the growth rate and the verdict can flip from cheap to expensive. It also ignores risk: two companies with the same PEG can have very different earnings quality, balance-sheet strength, and predictability. And it overlooks dividends, so it can understate the appeal of slower-growing companies that return a lot of cash to shareholders. Use it alongside other measures rather than as a single answer.
Disclaimer: This calculator is foreducation and illustration only. The PEG ratio depends entirely on an uncertain growth estimate and ignores risk and dividends, so its output is a starting point for analysis, not a recommendation. Nothing here is investment, tax, or trading advice.