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PEG Ratio
P/E ratio divided by expected earnings growth rate, adjusting valuation for growth.
PEG Ratio
The PEG ratio adjusts the traditional P/E ratio by factoring in expected earnings growth.
Formula
PEG = P/E Ratio ÷ Annual EPS Growth Rate
Interpretation
- Below 1.0: Stock may be undervalued relative to its growth
- Equal to 1.0: Fairly priced for its growth rate
- Above 2.0: May be overvalued even considering growth
Example
A stock with P/E of 30 and expected growth of 25% has PEG = 1.2. A stock with P/E of 15 and growth of 5% has PEG = 3.0. Despite the lower P/E, the second stock is more expensive relative to growth.
Limitations
- Relies on growth estimates which may be wrong
- Does not account for risk—a volatile company may deserve a lower PEG
- Ignores the duration of growth—10% growth for 2 years differs from 10 years
Key Takeaways
- Context matters when interpreting any financial metric.
- Combine multiple data points for informed decisions.
- Continue learning to build investment knowledge.
Quick Reference
Category
Valuation
Difficulty
Beginner
Reading Time
1 min
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Learn More
Where You'll See This
This concept appears throughout stock detail pages and financial data.