PEG Ratio Calculator

Calculate PEG, P/E ratios, and earnings growth with this free, easy-to-use PEG Ratio Calculator

P/E Ratio

Earnings Growth

What is the PEG Ratio?

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.

How to Calculate the PEG Ratio?

The formula for the PEG Ratio is:

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

Where:

  • P/E Ratio: The Price-to-Earnings ratio, showing how much investors are willing to pay for each dollar of earnings.
  • Earnings Growth (%): The company's forecasted earnings growth rate over time, typically expressed as an annual percentage.

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

Why Use the PEG Ratio?

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:

  • Accounts for Growth: It adjusts for expected earnings growth, making it more informative than the P/E ratio alone.
  • Identifies Growth at a Reasonable Price: It helps find companies that are undervalued relative to their future growth potential.
  • Cross-Sector Comparisons: The PEG ratio can be applied across industries to assess whether a stock is a good value, regardless of its industry’s specific growth characteristics.

Interpreting the PEG Ratio

  • PEG < 1: Generally considered a good investment as it suggests the stock may be undervalued relative to its growth.
  • PEG = 1: Indicates that the stock is fairly valued based on its earnings growth.
  • PEG > 1: Suggests the stock could be overvalued.

Advantages and Limitations of the PEG Ratio

Advantages:

  • Simplifies the comparison between companies with different growth rates.
  • Helps value growth companies where traditional metrics like P/E may not provide a complete picture.

Limitations:

  • The accuracy of the PEG ratio heavily depends on the reliability of future earnings growth projections.
  • It does not account for risk factors like volatility or market conditions, which may affect earnings growth.

How to Apply the PEG Ratio Formula in Real Life?

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:

  • Step 1: Look up a company’s P/E ratio and projected earnings growth rate. These figures can typically be found on financial news websites or stock analysis platforms like Yahoo Finance, Bloomberg, or Reuters.
  • Step 2: Apply the PEG formula: divide the P/E ratio by the growth rate.
  • Step 3: Interpret the PEG ratio: A PEG ratio below 1 may signal that the stock is undervalued given its growth rate. A PEG above 1 might mean the stock is expensive for its growth prospects.

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

What is a Good PEG Ratio?

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.

Things to Take Note When Using the PEG Ratio

  • Projected Growth Accuracy: The PEG ratio relies on future earnings growth projections, which can be uncertain and subject to change based on market conditions or company performance.
  • Volatility Risk: Companies with high growth rates tend to be more volatile, and unexpected changes can impact their valuations.
  • Industry Norms: Compare the PEG ratio of a company with others in the same industry to understand whether it offers a good investment relative to its peers.

PEG Ratio Calculator FAQs

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.