Calculator Panel
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Enter your values above and click Calculate.
What This Calculator Does
This calculator adjusts the standard P/E multiple for the company's growth potential, allowing investors to compare high-growth and slow-growth firms on a level field.
How to Use This Calculator
Enter the current P/E ratio and expected annual earnings growth percentage. Click Calculate to determine the PEG ratio.
How the Calculation Works
The underlying math engine processes your inputs using exact formulas. This systematic approach ensures professional, institutional-grade calculation precision:
Mathematical Formula
Formula Legend:
- · P/E Ratio = Stock price divided by earnings per share.
- · Expected Earnings Growth Rate = Projected annual percentage growth in earnings.
Practical Example
A stock has a P/E ratio of 30.0 and its earnings are expected to grow at 15.0% annually over the next 5 years:
Step-by-Step Mathematical Walkthrough:
- 1 P/E Ratio = 30.0.
- 2 Expected Growth Rate = 15.0.
- 3 PEG Ratio = 30.0 / 15.0 = 2.00.
- 4 The PEG ratio is 2.00, suggesting the stock might be expensive relative to its growth.
Important Assumptions & Notes
- The growth rate is entered as a whole percentage number (e.g. 15 for 15%).
- Both P/E and growth rate are positive, non-zero values.
Common Mistakes or Considerations
- Comparing PEG ratios based on historical growth with PEG ratios based on forward-looking analyst growth forecasts.
- Assuming a low PEG ratio means a stock is risk-free, without verifying if the growth estimates are realistic.
Frequently Asked Questions
What is the PEG ratio?
The PEG ratio is a valuation metric that enhances the P/E ratio by factoring in the expected earnings growth rate of the company.
How do you interpret a PEG ratio?
A PEG ratio of 1.0 is considered fairly valued. A PEG below 1.0 suggests the stock is undervalued relative to its growth, while a PEG above 1.0 suggests it is overvalued.
Who popularized the PEG ratio?
Legendary fund manager Peter Lynch popularized the PEG ratio, arguing that a fairly valued company's P/E should match its growth rate (PEG = 1.0).
Should I use Trailing or Forward Growth?
Forward growth is generally preferred as stock valuations are based on future cash potential, but trailing growth is more objective as it relies on actual historical reports.
What are the limitations of the PEG ratio?
It does not account for a company's debt levels, cash balance, dividend yields, or capital expenditures.