Calculate PEG, P/E ratios, and earnings growth with this free, easy-to-use PEG Ratio Calculator
The PEG Ratio (Price/Earnings to Growth) is a valuation metric used to determine a stock's relative value while considering the company's earnings growth. It is an extension of the widely used Price-to-Earnings (P/E) ratio. A lower PEG ratio may indicate that the stock is undervalued relative to its growth potential, whereas a higher PEG ratio could imply overvaluation.
The formula for the PEG Ratio is:
PEG Ratio = P/E Ratio / Earnings Growth (%)
Where:
For example, if a company has a P/E ratio of 15 and an earnings growth rate of 5%, the PEG ratio would be calculated as:
PEG = 15 / 5 = 3
The PEG Ratio offers a more comprehensive view of a stock's valuation by incorporating expected growth rates into the P/E ratio. Here’s why investors prefer using the PEG ratio:
Advantages:
Limitations:
In real life, investors often use the PEG ratio to assess the fair value of high-growth companies. Here’s a step-by-step example:
For instance, if you want to evaluate Nvidia (a high-growth tech company), you could find that Nvidia has a P/E ratio of 60, and a projected earnings growth rate of 30%. The PEG ratio would be:
PEG = 60 / 30 = 2
A PEG ratio below 1 is generally considered ideal, as it indicates that the stock’s price is low relative to its earnings growth. However, for fast-growing tech companies like Nvidia, a PEG ratio slightly above 1 might still be attractive due to high future growth prospects.
How is the PEG ratio different from the P/E ratio?
The P/E ratio only considers current earnings, while the PEG ratio includes future growth, offering a forward-looking perspective.
What does a negative PEG ratio mean?
A negative PEG ratio occurs when a company's earnings growth is negative, which often indicates a struggling or declining company.
Can the PEG ratio be used for all types of stocks?
The PEG ratio is most useful for growth stocks. For mature, stable companies with limited growth potential, other valuation metrics might be more appropriate.