PEG Ratio Calculator

What the PEG ratio is for

A price-to-earnings ratio on its own cannot tell you whether a stock is expensive, because it says nothing about what the earnings will do next. A company on 12× earnings that is shrinking is dearer than one on 30× earnings that is compounding at 30% a year. PEG is the crudest possible fix for that: divide the multiple by the growth rate, and read the result as the price you are paying per point of growth.

Peter Lynch put the idea into general circulation in One Up on Wall Street with a simple rule — the P/E of a fairly priced company equals its growth rate, so PEG equals 1. Below 1 the market is charging you less than a point of multiple per point of growth; above 1 it is charging more. That is a screening heuristic rather than a valuation model, and treating it as more than that is the single most common misuse of the ratio.

The reason it works at all is that both a higher growth rate and a lower required return raise a justified P/E, and over the range of growth rates most large companies actually achieve, the relationship between the two is roughly linear. Outside that range — very high growth, very low growth, or a company whose risk is unusual — the linear approximation breaks down badly, and PEG stops being informative long before it stops producing a number.

The formula, and the unit trap inside it

The numerator is the ordinary P/E: share price divided by earnings per share. Use diluted EPS, and decide once whether you are working with trailing or forward earnings — a trailing P/E paired with a forward growth rate is a mismatch that flatters fast growers.

The denominator is where mistakes happen. The growth rate enters as a number of percentage points, not as a decimal. Eighteen percent growth enters as 18. Enter 0.18 and the ratio comes out a hundred times too large. There is no dimensional consistency to protect you here: PEG is a ratio between a pure number and a percentage, which is precisely why it has no theoretical foundation and why nobody has ever agreed on a unit for it.

The dividend-adjusted variant adds the dividend yield to the denominator: PEG_adj = (P/E) ÷ (g + y). The logic is that total shareholder return comes from growth and income, so a company paying out 3% and growing at 7% is delivering the same 10% as a company growing at 10% and paying nothing. Because the yield only ever enlarges the denominator, the adjusted figure is never higher than the plain one, and it equals it exactly when the yield is zero. Both versions are in circulation; what matters is applying one of them to every company in a comparison rather than choosing per company.

Rearranging gives the useful inverse. Setting PEG to 1 and solving for price gives P = EPS × g. At $4 of EPS and 18% growth, that is $72 — the price at which the market would be charging exactly one point of P/E per point of growth.

How to read the number

Around 1.0 is the conventional fair-value marker, but it is a convention, not a result. It embeds an implicit assumption about the discount rate; a company with a genuinely low cost of equity deserves a PEG above 1, and a risky one deserves less than 1.

Below about 0.5, be suspicious rather than pleased. A very low PEG usually means one of three things: the growth forecast is stale or too optimistic, the trailing earnings contain a one-off gain that inflates the E, or the market has information about deterioration that the consensus estimate has not caught up with. Check whether the earnings in the denominator of the P/E are the ones a buyer would actually receive.

Above 2.0, the case has to rest on something PEG does not see — durability of growth beyond the forecast horizon, unusually low risk, or optionality. Those can be entirely real. They are just not in the ratio.

PEG is only comparable within a peer group. Cross-sector comparisons are close to meaningless because the sectors differ in risk, capital intensity and the persistence of their growth. A software company and a regional bank on the same PEG are not equivalently priced. Compare PEG against direct competitors and against the same company's own history, and back the reading up with a multiple that does not depend on a forecast, such as the price-to-book ratio.

One structural weakness deserves naming: PEG is very sensitive to the growth input, and the sensitivity is asymmetric. Because PEG varies as 1/g, cutting a growth estimate by 20% raises PEG by 25%, while raising the estimate by 20% lowers PEG by only 16.7%. The sensitivity table in the results panel shows this directly for whatever numbers you have entered.

PEG at common combinations of P/E and growth

The diagonal where P/E equals the growth rate is the PEG = 1.00 line. Notice how flat the ratio is across the bottom-right of the table: at high growth rates, large differences in P/E produce small differences in PEG, which is why PEG discriminates poorly among fast growers.

Ways a PEG ratio misleads

• Entering growth as a decimal. 18% must be entered as 18, not 0.18. This is the most frequent error and it produces a PEG that is wrong by two orders of magnitude.
• Mixing trailing earnings with forward growth. If the E is last year's and the g is next year's, part of the growth is double-counted. Pick a basis and hold it across every company you compare.
• Applying it to a loss-maker or a cyclical trough. A negative or artificially depressed EPS makes the P/E meaningless, and so PEG inherits the problem. This calculator refuses to produce a PEG when EPS is not positive.
• Trusting a single analyst growth number. The denominator is a forecast, and forecasts are systematically optimistic for the fastest growers. Run the ratio at a growth rate 20% below consensus before acting on a low PEG.
• Comparing across sectors. Risk and growth persistence differ enormously between industries, and PEG assumes they do not.
• Ignoring the balance sheet. PEG uses equity price and equity earnings, so two companies with the same PEG and very different leverage are not equally risky. Read it alongside net debt to EBITDA.

PEG among the other relative-valuation multiples

PEG belongs to a family of ratios that price a company against a single fundamental. The plain P/E prices earnings; the price-to-book ratio prices the balance sheet and is the standard tool for banks and insurers; EV/EBITDA prices the whole enterprise and is unaffected by capital structure. PEG's contribution is that it is the only one of them that puts a forecast in the denominator, which is both its usefulness and its weakness.

Where a relative multiple is not enough, the honest alternative is a discounted cash flow. Building one forces you to state the discount rate, the growth path and the terminal assumption explicitly instead of hiding all three inside a single number — start with the cost of equity, forecast free cash flow to equity, and compare the answer with what the PEG implies. If the two disagree strongly, the disagreement is usually in the growth persistence assumption, which PEG cannot express at all.

A final cross-check worth making: ask whether the growth in the denominator is being paid for. A company can only grow earnings without new equity at its sustainable growth rate, and a forecast far above that rate implies either share issuance or rising leverage. Neither is free, and neither is anywhere in the PEG.

Key terms

Earnings yield

EPS divided by price — the reciprocal of the P/E, expressed as a percentage. It makes equity comparable with a bond yield.

Forward PEG

PEG computed with next year's expected EPS in the P/E rather than trailing EPS. It is lower than the trailing version for any company with positive growth.

Growth-justified P/E

The P/E that would produce a PEG of exactly 1.00 — numerically equal to the growth rate in percentage points.