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Glossary
Valuation

PEG ratio

Price/Earnings to Growth

The P/E adjusted for how fast earnings are growing.

The PEG tries to answer the obvious objection to the P/E: that a fast grower deserves a higher multiple. Divide the P/E by the growth rate, and a P/E of 30 on 30% growth gives a PEG of 1.0.

A PEG below 1 is traditionally considered attractive. Treat this as a rough filter rather than a rule, because the whole thing rests on a growth forecast, and growth forecasts are the least reliable input in finance.

The formula
PEG = P/E ÷ expected annual earnings growth (%)
Figure

The order matters more than the maths

Do I understand how it makes money?1st
Does it actually make money?2nd
Will it survive a bad year?3rd
Is it cheap?last

Cheapness is the last question. Ask it first and you produce a list of companies the market has given up on, and it is usually right.

Why it matters

It stops you dismissing every fast-growing company as expensive.

The mistake everyone makes

Using a growth rate that cannot possibly persist. High growth mean-reverts, and the PEG assumes it will not.

Related terms

P/E ratio
How many years of current profit you are paying for the shares.
Forward P/E
The P/E using next year's forecast earnings instead of last year's actual ones.

See PEG ratio on a real company

SteadyShares pulls this straight from the filings for 1,100+ companies, alongside moat scores, DCF fair value and peer comparison. Free to look around.

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