PEG Ratio Calculator
Calculate the Price/Earnings to Growth (PEG) ratio to assess whether a stock is undervalued or overvalued relative to its earnings growth rate. The PEG ratio is particularly useful for evaluating growth stocks.
Stock Valuation Metrics
PEG Ratio Results
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Fair Value Assessment:
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Growth vs Value:
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Investment Analysis
Relative Valuation:
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Growth Premium:
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Business Insights
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Market Expectations:
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Understanding PEG Ratio
The Price/Earnings to Growth (PEG) ratio is a valuation metric that compares a company's price-to-earnings (P/E) ratio to its earnings growth rate. It provides a more nuanced view of valuation by factoring in growth expectations, making it particularly useful for evaluating growth stocks.
PEG Ratio Formula
Basic Formula
- PEG Ratio = P/E Ratio / Earnings Growth Rate
- P/E Ratio = Price per Share / Earnings per Share
- Growth Rate = Expected earnings growth rate (%)
- Lower PEG indicates better value relative to growth
Forward vs Trailing
- Forward PEG uses expected future growth
- Trailing PEG uses historical growth
- Forward PEG is more relevant for valuation
- Trailing PEG shows past performance
PEG Ratio Interpretation
Valuation Guidelines
General PEG ratio valuation ranges
PEG < 1.0
- Potentially undervalued
- P/E lower than growth rate
- Good value for growth
- Attractive investment opportunity
PEG = 1.0
- Fairly valued
- P/E equals growth rate
- Balanced valuation
- Reasonable investment
PEG > 1.0
- Potentially overvalued
- P/E higher than growth rate
- Expensive relative to growth
- Requires careful analysis
PEG > 2.0
- Significantly overvalued
- Growth expectations too high
- High risk investment
- Avoid unless exceptional circumstances
Advantages of PEG Ratio
| Advantage | Explanation | Benefit |
|---|---|---|
| Growth Adjusted | Accounts for earnings growth | Better than P/E alone |
| Relative Valuation | Compares growth to valuation | Fair comparison across stocks |
| Simple to Use | Easy calculation and interpretation | Accessible to all investors |
PEG Ratio Limitations
Growth Rate Accuracy
- Growth estimates can be wrong
- Forward-looking assumptions
- Subject to analyst bias
- Historical growth may not continue
Quality of Earnings
- P/E based on reported earnings
- Earnings quality varies
- One-time items affect results
- Accounting differences
PEG Ratio vs Other Metrics
vs P/E Ratio
- PEG adjusts P/E for growth
- P/E alone ignores growth
- PEG better for growth stocks
- P/E better for stable companies
vs Price to Sales
- PEG focuses on earnings growth
- P/S focuses on revenue growth
- PEG more relevant for profitable companies
- P/S better for unprofitable growth stocks
Industry Considerations
High Growth Industries
- Technology, biotech
- Higher PEG ratios acceptable
- Growth expectations very high
- PEG 1.5-2.5 may be reasonable
Stable Industries
- Utilities, consumer staples
- Lower PEG ratios preferred
- Growth expectations modest
- PEG 0.8-1.2 more appropriate
Key Takeaways for PEG Ratio
- PEG Ratio = P/E Ratio / Earnings Growth Rate adjusts valuation for growth expectations
- A PEG ratio below 1.0 suggests the stock may be undervalued relative to its growth
- PEG ratio above 2.0 typically indicates overvaluation, especially for stable companies
- Use forward-looking growth estimates for more accurate PEG calculations
- PEG ratio is most useful for comparing companies with different growth rates
- Consider industry norms when interpreting PEG ratios
- PEG ratio works best when combined with other valuation metrics
- Quality of earnings and sustainability of growth are crucial considerations