The price/earnings to growth ratio (PEG ratio) is a stock's price-to-earnings (P/E) ratio divided by the growth rate of its earnings for a specified time period.
The PEG ratio is used to determine a stock's value while also factoring in the company's expected earnings growth, and it is thought to provide a more complete picture than the more standard P/E ratio. A lower PEG may indicate that a stock is undervalued.
How to Calculate the PEG Ratio
PEG Ratio = (Price/EPS) / EPS Growth
where:
EPS = The earnings per share
To calculate the PEG ratio, an investor or analyst needs to either look up or calculate the P/E ratio of the company in question. The P/E ratio is calculated as the price per share of the company divided by the earnings per share (EPS), or price per share / EPS.
Once the P/E is calculated, find the expected growth rate for the stock in question, using analyst estimates available on financial websites that follow the stock. Plug the figures into the equation, and solve for the PEG ratio number.
Source: Investopedia, Price/Earnings-to-Growth (PEG) Ratio: What It Is and the Formula, accessed 24 December 2023, <https://www.investopedia.com/terms/p/pegratio.asp>
Comments