PEG Ratio
The price-to-earnings ratio divided by the expected annual earnings growth rate, used to judge whether growth justifies the multiple.
Formula
PEG = Price-to-Earnings Ratio / Expected Annual Earnings Growth Rate (in percent)
Unit
ratio (x, times)
In depth
The PEG exists because a P/E on its own cannot distinguish an expensive slow grower from a fairly priced fast one, and a value near 1 is the customary rough test of reasonableness. Its weaknesses are considerable: it treats a growth rate as a single number when growth decays, ignores risk and capital intensity entirely, and produces nonsense for negative or near-zero growth. It is also acutely sensitive to which growth rate is used — historical, next year's, or a five-year forecast can differ by a factor of two. Treat it as a sanity check that flags a mismatch, not as a valuation method in its own right.
Worked example
A P/E of 20 with expected growth of 25% gives a PEG of 20 / 25 = 0.8, which screens as reasonable. If growth is actually 10%, the PEG is 20 / 10 = 2.0, and the same share screens as expensive on the identical price.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “PEG Ratio” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.