PEG Ratio: worked example
| Price-to-earnings ratio | 25 |
|---|---|
| Expected annual earnings growth | 15.0% |
| PEG ratio | 1.67× |
| P/E that would give a PEG of 1 | 15 |
Common error: Treating a PEG of 1 as a rule that separates cheap from dear. It is a rough convention, and it breaks down for slow-growth firms and for growth rates that cannot last.
PEG Ratio: formula
The growth input is a forecast and the weakest part: analysts overestimate growth often and the ratio moves a lot when the estimate is revised. It fails for companies with negative or near-zero growth and works poorly for cyclical, financial and very small-cap firms. It ignores dividends, debt and risk.
Enter the P/E ratio and the expected annual earnings growth rate as a percentage. Use the same P/E basis, trailing or forward, as the growth estimate: a forward P/E pairs with next year's growth. Analyst growth estimates are available from financial sites, and several years of expected growth are more meaningful than one.
Avoid a growth input from a single unusual year.
PEG Ratio: changing Price-to-earnings ratio
| Price-to-earnings ratio | PEG ratio | P/E that would give a PEG of 1 |
|---|---|---|
| 20 | 1.33× | 15 |
| 23 | 1.53× | 15 |
| 25 (example) | 1.67× | 15 |
| 28 | 1.87× | 15 |
| 30 | 2.00× | 15 |
PEG Ratio: compare input ranges
| Input | Tested from | To | PEG ratio: low input | PEG ratio: high input | Swing |
|---|---|---|---|---|---|
| Expected annual earnings growth | 13.0% | 17.0% | 1.92× | 1.47× | 0.45× (27%) |
| Price-to-earnings ratio | 23 | 28 | 1.53× | 1.87× | 0.33× (20%) |
PEG Ratio: individual input comparisons
| Input | Value | PEG ratio | P/E that would give a PEG of 1 |
|---|---|---|---|
| Price-to-earnings ratio | 20 | 1.33× | 15 |
| 23 | 1.53× | 15 | |
| 25 | 1.67× | 15 | |
| 28 | 1.87× | 15 | |
| 30 | 2.00× | 15 | |
| Expected annual earnings growth | 11.0% | 2.27× | 11 |
| 13.0% | 1.92× | 13 | |
| 15.0% | 1.67× | 15 | |
| 17.0% | 1.47× | 17 | |
| 19.0% | 1.32× | 19 |
PEG Ratio: combined input changes
| Price-to-earnings ratio / Expected annual earnings growth | 11.0% | 15.0% | 19.0% |
|---|---|---|---|
| 20 | 1.82× | 1.33× | 1.05× |
| 23 | 2.09× | 1.53× | 1.21× |
| 25 | 2.27× | 1.67× | 1.32× |
| 28 | 2.55× | 1.87× | 1.47× |
| 30 | 2.73× | 2.00× | 1.58× |
PEG Ratio: which assumptions move the result?
PEG Ratio: values and definitions
| Quantity and definition | Value used |
|---|---|
| Price-to-earnings ratio | 25 |
| Expected annual earnings growth — An analyst or your own estimate of yearly earnings growth. It is a forecast, not a fact. | 15.0% |
| PEG ratio | 1.67× |
| P/E that would give a PEG of 1 | 15 |
PEG Ratio: half and double Expected annual earnings growth
| Expected annual earnings growth | PEG ratio |
|---|---|
| 7.5% | 3.33× |
| 15.0% | 1.67× |
| 30.0% | 0.83× |
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The PEG ratio adjusts a P/E for growth by dividing one by the other. A P/E of 25 looks rich on its own, but with 15 percent expected earnings growth it works out to about 1.7, and a P/E of 15 would equal a PEG of exactly 1. The output beside it shows that reference P/E, so you can see how far the current multiple sits from it.
Question the growth number. It is a forecast, and a PEG built from a favorable estimate looks better than the stock deserves.
PEG relates price-to-earnings to assumed growth; Graham valuation uses a different earnings-and-book-value expression. The EPS calculator computes the earnings figure, and the dividend payout ratio shows how much of earnings goes to shareholders. Compare PEG values within the same industry.
Does PEG above 1 prove a share is overpriced?
No. The ratio omits risk, dividends, debt and the reliability or duration of the growth estimate.
What is a good PEG ratio?
PEG divides the stated P/E by an entered earnings-growth percentage. The result depends strongly on the growth definition and horizon. A ratio near one does not by itself establish fair value; compare the reliability and basis of the earnings and growth figures.
Why use PEG instead of P/E?
P/E alone penalizes fast-growing companies. PEG divides by growth so you can compare a high-growth company with a slower one on a similar basis.
Which growth rate should I use?
Use a clearly identified earnings-growth measure and horizon consistent with the P/E basis. A one-year rebound from depressed earnings can create a very different PEG from a multi-year forecast. Treat a forecast as uncertain rather than assuming the calculator validates it.