Valuation · updated October 21, 2026
What is the PEG ratio and how is it calculated
PEG links P/E to profit growth: it shows whether a high price is backed by how fast the company is growing. A PEG around 1 means you pay a P/E equal to the yearly growth rate.
PEG formula
- P/E
- Share price divided by earnings per share.
- Annual growth
- How many percent earnings per share grow each year, written as a number (15% becomes 15).
Worked example
Two companies have the same P/E of 30. The first grows profit 30% a year, the second 10%.
At the same P/E, the first one is three times cheaper once you account for growth.
How to read PEG
PEG depends entirely on the growth estimate. A 40% growth rate that will not repeat makes PEG look low and can fool you.
When PEG can fool you
One-year growth: if profit bounced back after a weak year, growth looks huge and PEG looks small. Falling profit: a negative PEG means nothing.
Related terms
Questions about PEG
What is a good PEG?
Many investors look for a PEG below 1, because then they pay less than the growth rate. It only works if the growth estimate is realistic.
These explanations are for information only. They are not a recommendation to buy or sell.
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