PEG Ratio Calculator
The PEG ratio improves on the P/E ratio by adjusting for earnings growth. Two companies with the same P/E of 20 look equally priced on a P/E basis, but if one is growing at 30% per year and the other at 10%, the faster-growing company actually offers better value relative to its growth prospects. PEG below 1.0 is often cited as a sign of undervaluation; PEG above 2.0 suggests the market may be pricing in overly optimistic growth. Enter the share price, earnings per share, and the expected annual EPS growth rate to compute the P/E and PEG ratios.
PEG ratio formula
P/E ratio = share price / EPS
PEG ratio = P/E ratio / annual EPS growth rate (%)
Note: the growth rate in the denominator is the percentage figure (e.g., enter 15 for 15%, not 0.15). This convention is standard in investment analysis. A PEG of 1.0 at a 15% growth rate corresponds to a P/E of 15.
Interpreting the PEG ratio
- PEG below 1.0: potentially undervalued relative to growth; may represent a buying opportunity.
- PEG near 1.0: stock is roughly fairly valued relative to its growth rate.
- PEG above 2.0: market expectations for growth may already be fully priced in; higher risk if growth disappoints.
- PEG is best used for growth companies with positive and consistent earnings; it is less meaningful for value, cyclical, or dividend-focused companies.
- Always cross-check with other metrics (price-to-sales, enterprise value / EBITDA, free cash flow yield) before making investment decisions.
Frequently asked questions
What is the PEG ratio?
The PEG (price/earnings to growth) ratio adjusts the P/E ratio for earnings growth. PEG = P/E / annual earnings growth rate (%). A PEG of 1.0 suggests the stock is fairly valued relative to its growth. Below 1.0 may indicate undervaluation; above 2.0 may indicate overvaluation.
What growth rate should I use?
Typically you use the expected 5-year annual EPS growth rate, often sourced from analyst consensus estimates. You can also use the historical 5-year EPS growth rate for comparison. The SEC requires prospectuses to disclose how growth rates are calculated for marketing materials.
Who popularized the PEG ratio?
The PEG ratio was popularized by investor Peter Lynch in his book 'One Up on Wall Street' (1989). Lynch suggested that a PEG of 1.0 represents fair value when using a growth rate equal to the stock's P/E ratio.
What are the limitations of the PEG ratio?
PEG relies on earnings growth estimates that can be wrong. It does not account for risk, balance sheet quality, or capital intensity. Comparing PEG ratios across different industries can be misleading. High-yield or cyclical companies are poorly suited to PEG analysis.
Can PEG be negative?
Yes. If earnings growth is negative (earnings declining), the PEG ratio is negative, which is not a useful signal. The ratio is only meaningful for companies with positive and growing earnings.
Official sources
- SEC EDGAR: EPS in Annual and Quarterly Reports.
- SEC: Investor Publications - Getting Started.
Reviewed by the CalculatorHub team, edited by James Graham, 15 June 2026. See our methodology.