βοΈ PEG Ratio Calculator
Is the P/E justified by the growth rate?
P/E divided by earnings growth rate
Estimates for planning only, not financial advice.
The PEG ratio divides a stock's P/E by its expected earnings growth rate, answering whether the price tag is justified by how fast profits are growing. A P/E of 25 sounds expensive until you learn earnings grow 20 percent a year: the PEG is 1.25, roughly fair. Peter Lynch popularized it with a simple rule: a fairly priced company has a PEG near 1.0.
How to Use This Calculator
Enter the P/E ratio (trailing or forward, but be consistent) and the expected annual earnings growth rate in percent over the next few years. The calculator divides the two. Use analyst estimates or your own forecast for growth, and know that the growth number is where all the uncertainty lives.
Enter the P/E ratio. Forward P/E pairs best with forecast growth; trailing P/E pairs with historical growth.
Enter expected annual EPS growth as a percent. Multi-year estimates beat single-year guesses.
Read the PEG. For the P/E input itself, our P/E ratio calculator breaks it down.
The PEG Ratio Formula
The growth rate goes in as a whole number, not a decimal: 20 percent enters as 20. The ratio is unitless and most useful for comparing companies with similar risk. It implicitly assumes growth justifies multiples linearly, which is roughly true for moderate growth but breaks down at extremes.
Worked Example
A stock trades at $150 with earnings per share of $6, so its P/E is 25. Analysts expect earnings to grow 20 percent annually for the next three years. PEG is 25 divided by 20, which is 1.25. That sits just above Lynch's fair-value line of 1.0: not obviously cheap, not clearly expensive. If growth instead came in at 30 percent, the PEG would be 0.83, screening as cheap.
Reading Your Result
Below 1.0 suggests the market underprices the growth; above 1.5 suggests it overpays. But PEG is a screening tool, not a verdict. It ignores risk differences, assumes growth continues, and says nothing about balance-sheet quality. A PEG of 0.7 on a dying retailer is not the bargain it appears.
My rule: distrust the growth input more than the ratio. Analyst estimates skew optimistic, and one heroic growth forecast can make any P/E look reasonable. Haircut the estimate by a third and recompute; if the PEG still looks good, you might have something. If it only works with the rosiest forecast, you have a story, not a value. For growth grounded in cash rather than accounting, our price to cash flow calculator is the tougher test.
Estimates for planning only, not financial advice.
Frequently Asked Questions
What is the PEG ratio?
The PEG ratio is a stock's price-to-earnings ratio divided by its expected annual earnings growth rate. It adjusts the P/E for growth: a high P/E can be justified by fast growth, and a low P/E can still be expensive if earnings are shrinking. Peter Lynch popularized it as a fair-value test.
What is a good PEG ratio?
Around 1.0 is considered fairly priced by Lynch's rule of thumb. Below 1.0 suggests undervaluation relative to growth; above 1.5 suggests overvaluation. These are screening thresholds, not laws, and they work best comparing similar companies. Lynch himself warned it suits steady growers, not cigar butts or moonshots.
How is PEG different from P/E?
P/E measures what you pay for each dollar of current earnings. PEG measures what you pay relative to how fast those earnings grow. P/E alone can make a fast grower look expensive and a declining business look cheap; PEG corrects for the growth trajectory.
Should I use trailing or forward earnings?
Match them: forward P/E with forecast growth, trailing P/E with historical growth. Mixing trailing P/E with forecast growth is the most common setup and is fine, but know that forecast growth carries the most uncertainty in the whole calculation. Analyst long-term growth forecasts skew optimistic, so haircut them before trusting the PEG.
Why does PEG fail for some companies?
It needs positive earnings and positive growth, so it is useless for unprofitable companies and misleading for cyclical ones at earnings peaks or troughs. It also ignores debt, risk differences, and the quality of growth. Use it as a screen, then do real work.
Can PEG be negative?
Mathematically yes, when earnings or growth are negative, but a negative PEG is meaningless for valuation. Drop the ratio and analyze the business directly instead of forcing a growth multiple onto shrinking earnings. Negative PEGs also appear with positive earnings but negative growth: equally useless, same prescription.
What growth period should I use?
Three to five years of expected annual growth is standard. One-year growth is too noisy; ten-year forecasts are fiction. Be consistent when comparing two stocks, and remember that high growth rates rarely persist as long as models assume. Five-year expected growth is the classic input; pair it with a PEG under 1.0 for the traditional screen.
Does PEG account for dividends?
No. A stock with a 4 percent yield and a PEG of 1.2 may be a better total-return deal than a no-yield stock at 1.0. Some investors use a dividend-adjusted PEG, adding the yield to the growth rate, to compare income stocks fairly.
Why do growth investors dislike PEG?
Because truly exceptional growers can deserve PEGs well above 1.0 for years; the ratio penalizes the best compounders. PEG fits steady growers better than wide-moat compounders where the market rationally pays up for durable growth. They prefer to pay up for certainty of compounding and accept the PEG as the price of quality.
Is a PEG below 1 always a buy?
No. Low PEGs cluster in declining industries, value traps, and companies with hidden risks the market sees and the ratio does not. A cheap PEG is an invitation to investigate, starting with why the market refuses to pay for the growth.