PEG Ratio Calculator

Calculate the PEG Ratio with our free calculator. Determine if a stock is undervalued or overvalued by comparing its P/E ratio to its earnings growth rate.

Stock Inputs
$
Current market price per share
$
Trailing twelve months (TTM) EPS
%
Expected annual EPS growth rate
Additional Options

What Is the PEG Ratio?

The PEG ratio is a stock valuation metric that helps investors understand how a company's share price compares with its earnings growth potential. It combines the price-to-earnings (P/E) ratio with the company's expected earnings growth rate to give a broader picture of its valuation.

The P/E ratio shows how much investors are willing to pay for each rupee or dollar of a company's earnings. However, it does not consider how quickly those earnings are expected to grow. The PEG ratio adds this growth perspective, helping investors compare companies with different growth expectations.

For example, a company with a high P/E ratio may appear expensive at first. However, if its earnings are expected to grow significantly faster than those of another company, its PEG ratio may be lower. This can help investors evaluate whether the share price seems reasonable relative to its expected growth.

A lower PEG ratio may suggest that a stock offers better value compared with its expected earnings growth. However, a low PEG ratio does not automatically mean that a stock is undervalued. The result depends on the reliability of growth forecasts, the company's financial performance, and other market factors.

Investors can use the PEG ratio alongside other measures, such as the P/E ratio, revenue growth, profitability, debt levels, and industry comparisons. Looking at these factors together provides a more complete picture of a company's valuation and helps investors make more informed decisions.

PEG Ratio Formula and Calculation

The PEG ratio formula helps investors understand how a stock's price compares with its expected earnings growth. It combines the price-to-earnings (P/E) ratio with the company's expected annual earnings growth rate to provide a clearer picture of a stock's valuation.

The formula is:

    PEG Ratio = P/E Ratio ÷ Earnings Growth Rate (%)

Here are the two components of the formula:

  • P/E Ratio: The price-to-earnings ratio compares a company's share price with its earnings per share (EPS). It helps investors understand how much they are paying for each unit of the company's earnings.
  • Earnings Growth Rate: This represents the expected annual percentage growth in a company's earnings. For example, an expected growth rate of 12% means the company's earnings are projected to increase by 12% per year.

Example of PEG Ratio Calculation

Suppose a company has a P/E ratio of 24 and an expected annual earnings growth rate of 12%. You can calculate its PEG ratio as follows:

Step 1: Identify the P/E ratio.

    P/E Ratio = 24

Step 2: Identify the expected earnings growth rate.

    Earnings Growth Rate = 12%

Step 3: Apply the formula.

    PEG Ratio = 24 ÷ 12 = 2.0

The company's PEG ratio is 2.0.

When learning how to calculate PEG ratio, remember that this commonly used formula treats the growth rate as a percentage number rather than a decimal. Therefore, you use 12 for a growth rate of 12%, not 0.12.

A PEG ratio of 2.0 means the P/E ratio is twice the expected annual earnings growth rate expressed as a percentage number. Investors can use this figure alongside other financial information to evaluate a stock's valuation. However, a PEG ratio alone cannot determine whether a stock is a good investment, as actual earnings growth may differ from expectations.

How to Use the PEG Ratio Calculator

Using the PEG Ratio Calculator is simple. Enter a few details about a company's stock and expected earnings growth to calculate its PEG ratio.

Follow these steps:

  1. Enter the Current Stock Price: Enter the stock's current market price per share in dollars.
  2. Enter Earnings Per Share (EPS): Enter the company's trailing twelve-month (TTM) earnings per share. This value represents the company's earnings over the past 12 months for each outstanding share.
  3. Enter the Earnings Growth Rate: Enter the expected annual growth rate of the company's earnings as a percentage.
  4. Click Calculate: After entering all the required values, click the Calculate button to calculate the PEG ratio.
  5. Review the Results: Check the calculated PEG ratio to understand how the stock's valuation compares with its expected earnings growth. If you enable the Show Calculation Breakdown option, you can also review the calculation details provided by the tool.

This calculator saves time by calculating the P/E ratio from the stock price and EPS before determining the PEG ratio. It also helps you compare the valuation and expected earnings growth of different companies more easily.

Keep in mind that the PEG ratio is only one factor to consider when evaluating a stock. Expected earnings growth may not match actual results, so consider the company's financial health, industry conditions, and other valuation measures before making investment decisions.

Frequently Asked Questions (FAQs)

A PEG ratio of 1 is often used as a reference point when evaluating a stock's valuation relative to its expected earnings growth. It may suggest that the stock's price is reasonably aligned with its projected growth, but it does not guarantee that the stock is fairly valued.

Yes, a PEG ratio can be negative when a company has negative earnings or negative expected earnings growth. However, a negative result can be difficult to interpret and may not provide a meaningful basis for evaluating the stock's valuation.

No, a lower ratio is not always better. Although it may indicate that a stock is attractively priced relative to its expected growth, it could also reflect weak growth prospects, financial difficulties, or higher business risks. Investors should consider other financial factors before making a decision.

Yes, comparing this ratio can help investors evaluate companies relative to their expected earnings growth. However, comparisons are generally more useful when the companies operate in similar industries and use consistent growth assumptions. Differences in financial conditions, business risks, and future growth prospects should also be considered.

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