What Is PEG Ratio? Growth-Adjusted Valuation Explained

The PEG ratio (Price/Earnings-to-Growth ratio) improves on the P/E ratio by factoring in a stock's earnings growth rate. It tells you whether a stock is expensive or cheap relative to how fast the company is growing.

PEG Ratio = P/E Ratio ÷ Annual EPS Growth Rate (%)

Example: A stock with a P/E of 30 and 30% earnings growth has a PEG of 1.0 — considered fairly valued. A stock with P/E of 30 but only 10% growth has a PEG of 3.0 — considered expensive for its growth rate.

How to Interpret PEG

• PEG below 1.0: Potentially undervalued — you're paying less than the growth rate would justify.
• PEG of 1.0: Fairly valued — price matches the growth rate.
• PEG above 2.0: Potentially overvalued — you're paying a premium over the growth rate.

Forward PEG vs. Trailing PEG

Forward PEG uses analyst estimates for future earnings growth, which is more useful since stocks are priced on future expectations. Trailing PEG uses historical growth, which can be distorted by one-time events. StocksRankings uses forward PEG in its PEG rankings.

PEG Limitations

PEG depends on earnings growth estimates, which can be wrong. It doesn't work for companies with negative earnings or very low growth. It's most useful for growth-oriented investors evaluating tech, healthcare, and consumer stocks.

See the full PEG ratio rankings for S&P 500 and Nasdaq 100 stocks. Read next: What is P/E Ratio?