The PEG ratio adjusts the PE ratio for growth, so it shows how much you pay for each unit of expected profit growth. A stock with a PE of 20 and 20% expected growth has a PEG ratio of 1.0. This guide explains the formula, how to read it, a worked example and the limits you should know.
Key Takeaways
- PEG ratio = PE ratio divided by the expected annual earnings growth rate in percent.
- A reading near 1 is often treated as a rough balance between price and growth, but it is a rule of thumb and not a law.
- The growth input is an estimate, so the result is only as reliable as that forecast.
- It suits steady growers and works poorly for cyclical, loss-making or very fast-changing businesses.
- Always compare it with sector peers and the company’s own history, not with a single fixed cut-off.
In this article
- What is the PEG ratio?
- PEG ratio formula and how to calculate it
- How to read the PEG ratio
- PEG ratio worked example with numbers
- Growth-adjusted vs plain PE multiple
- When the measure works and when it misleads
- Where to find earnings and growth data
- Pros and cons
- Checklist and common mistakes
- Frequently asked questions
- The bottom line
What Is the PEG Ratio?
PEG stands for price to earnings to growth. It starts from the PE ratio, which compares a share price with earnings per share, and then divides that multiple by the growth rate of earnings. The idea is simple: a high PE can be fair if profit is growing fast, and a low PE can be poor value if profit is shrinking.
The measure is often linked with fund manager Peter Lynch, who used the idea that a fairly priced stock has a PE close to its growth rate. Our guide to the PE ratio covers the starting point in detail, and this measure builds on it.
Why investors use this growth-adjusted multiple
Two companies can both trade at a PE of 25. If one grows profit at 25% a year and the other at 8%, they are not equally priced. One number captures that difference, which makes a quick first screen easier for retail investors.
PEG Ratio Formula and How to Calculate It
The PEG ratio formula has one line:
- PEG ratio = PE ratio ÷ expected annual EPS growth rate (in percent, not as a decimal).
- PE ratio = market price per share ÷ earnings per share (EPS).
Use the growth rate as a whole number. A growth rate of 20% goes into the formula as 20, not 0.20.
Two ways to calculate the PEG ratio
You can use a trailing version, which divides the trailing PE by growth already reported, or a forward PEG, which divides the forward PE by an estimate of growth to come. The forward form looks ahead but depends on a forecast. Never mix a trailing PE with a forward growth number for one company and the opposite for another.
Choosing the growth input for the PEG ratio
- Past growth: the compound annual growth rate of EPS over three to five years.
- Analyst estimate: the average forecast of EPS growth for the next few years, if published.
- Management guidance: useful, but treat it with care because it is the company’s own view.
- Your own estimate: cut the number if the past rate came from one-time gains.
How to Read the PEG Ratio
There is no official band for a good reading. Many investors use the bands below as a starting guide, then adjust for sector, quality and risk.
A reading near 1
The price roughly matches the expected growth. This is the case people usually call fairly priced in simple screens, though a fair label still depends on how reliable the growth is.
A reading below 1
The market is paying less per unit of growth. That can signal value, or it can mean investors doubt that the growth will arrive. A very low number deserves a closer look at the forecast, not a quick conclusion.
A reading above 1
You are paying more per unit of growth. That can be fine for a high-quality business with strong returns on capital and a long growth runway. It becomes risky when growth slows and the multiple falls.
PEG Ratio Worked Example With Numbers
Suppose a company, Alpha Tech Ltd, reports the following. Every figure here is hypothetical and used only to teach the method.
Step-by-step PEG ratio calculation
- Alpha Tech trades at ₹480 and its latest EPS is ₹24, so PE ratio = 480 ÷ 24 = 20.
- Three years ago its EPS was ₹15. Growing from ₹15 to ₹24 means EPS rose 1.6 times, which is a compound growth rate of about 17% a year (1.6 to the power of one third is about 1.17).
- Using that past rate, PEG = 20 ÷ 17 = about 1.18.
- Suppose analysts expect growth of 20% a year. PEG = 20 ÷ 20 = 1.0. Forward check: next year’s EPS = 24 × 1.2 = ₹28.80, so forward PE = 480 ÷ 28.8 = about 16.67.
- If real growth turns out to be only 10%, PEG = 20 ÷ 10 = 2.0. The same price now looks twice as expensive.
| Company | Price | EPS | PE ratio | Growth | PEG ratio |
|---|---|---|---|---|---|
| Alpha Tech | ₹480 | ₹24 | 20 | 20% | 1.0 |
| Beta Foods | ₹300 | ₹20 | 15 | 12% | 1.25 |
| Gamma Retail | ₹450 | ₹15 | 30 | 15% | 2.0 |
| Delta Metals | ₹120 | ₹12 | 10 | 5% | 2.0 |
How sensitive the PEG ratio is to the growth input
Hold the PE at 24 and change only the growth estimate. At 8% growth the result is 24 ÷ 8 = 3.0. At 12% it is 2.0, at 16% it is 1.5 and at 24% it is 1.0. The same stock moves from expensive to balanced just because the forecast changes, which is why you should test several growth cases before trusting one number.
Growth-Adjusted vs Plain PE Multiple
The two measures answer different questions. The PE ratio says how many rupees you pay for one rupee of current profit. The growth-adjusted version asks whether that price is reasonable given how fast profit is expected to grow. Using both together is better than using either alone.
| Point | PE ratio | PEG ratio |
|---|---|---|
| What it measures | Price against current earnings | Price against earnings and growth |
| Inputs | Price and EPS | Price, EPS and a growth rate |
| Main weakness | Ignores growth | Depends on a forecast |
| Best for | Quick valuation check | Comparing growth stocks in one sector |
Book value gives a third angle. Our PB ratio explainer shows how price links to net assets, which matters more for banks and asset-heavy firms than a growth-adjusted multiple.
When the Measure Works and When It Misleads
This measure is a screening tool. It tells you where to look harder, not what to buy.
Cyclical and commodity companies
Steel, cement and chemical firms see profit swing with the cycle. A forecast of high growth at the bottom of a cycle can make the result look low, while the same company at a peak shows weak growth and a high ratio. Use average earnings over a full cycle instead.
Loss-making and very small-base companies
If EPS is negative or the starting profit is tiny, growth percentages become meaningless. A jump from ₹1 to ₹3 of EPS is 200% growth, but it says little about quality. For such cases use revenue growth, cash flow and the path to profit.
Prices also respond to money flows. Heavy foreign selling can lower a stock’s PE and so change the result even when growth is unchanged. Our explainer on how FII flows affect the stock market shows the channels, and the FII shareholding pattern guide helps you see who owns a stock.
Where to Find Earnings and Growth Data
Use official filings for inputs and treat a website’s ready-made ratio as a starting point. Page layouts change, so check each official site for current data.
| Source | What you can get | Note |
|---|---|---|
| Quarterly results filing on NSE or BSE | Net profit, EPS, share count | Add four quarters for trailing EPS |
| Annual report | Multi-year EPS, notes on one-time items | Needed to compute growth rate |
| Investor presentation | Management growth guidance | Treat as the company’s view |
| NSE Indices factsheets | Index-level PE and PB | Index level, not a single stock |
| Exchange quote page | Current market price | Only price moves during the day |
To see how institutions treat a sector, read the latest FII DII data today and our list of highest FII holding stocks in India.
Pros and Cons of PEG Ratio
| Pros | Cons |
|---|---|
| Adds growth to the PE ratio in a single number. | Depends on a growth forecast that may be wrong. |
| Easy to compute from data on any results page. | Different growth periods give different answers. |
| Helps compare growth stocks within one sector. | Fails for cyclical, loss-making or tiny-base firms. |
| Highlights when a high PE is backed by growth. | Ignores debt, cash flow quality and risk. |
| Works as a fast first screen before deeper work. | Often treats 1 as fair, though no rule says so. |
Checklist and Common Mistakes
- Confirm the business has steady, positive earnings.
- Compute the PE from the latest filing, on a consistent basis.
- Pick a growth rate and note whether it is past, analyst or your own.
- Run the calculation under low, base and high growth cases.
- Compare with sector peers and the company’s own history.
- Check debt, return on equity and cash flow before deciding anything.
Common mistakes to avoid
Using one growth number as fact. It is an estimate. Entering growth as a decimal. Use 20, not 0.20. Comparing across sectors. A software firm and a steel maker have different growth norms. Ignoring one-time gains that inflate past growth. Treating 1 as a buy signal. It is only a rough reference point.
Frequently Asked Questions
What is the PEG ratio in simple words?
It is the PE ratio divided by the expected annual earnings growth rate. It shows how much you pay for each unit of growth.
How do you calculate the PEG ratio?
Divide the PE ratio by the expected annual EPS growth rate in percent. For example, a PE of 20 and growth of 20% gives a result of 1.0.
What is a good PEG ratio?
There is no official number. A reading near 1 is often seen as balanced, but what counts as good depends on sector, quality and how reliable the growth forecast is.
Is a PEG ratio below 1 always better?
No. A low reading can mean good value, or it can mean investors do not believe the growth forecast. Check earnings quality and debt before reading it as cheap.
What is the difference between PEG ratio and PE ratio?
The PE ratio compares price with current earnings. The PEG ratio adds expected growth, so it helps judge whether a high PE is backed by faster profit growth.
The Bottom Line
The PEG ratio is a quick way to ask whether a PE multiple is backed by growth. It works best for profitable companies with steady, forecastable earnings and works poorly for cyclical or loss-making ones. Treat it as a screen, test several growth cases and read it alongside debt, returns on equity and peer multiples.
Our practical next step: pick one company you follow, take its latest EPS and price from the exchange filing, compute the PE, then calculate it under three growth cases the way the worked example does. Then check the latest FII and DII data to see how institutions are positioned, and browse more explainers in our blog category.
Sources: NSE; BSE; SEBI; NSE Indices website. Worked examples use hypothetical numbers checked by calculation.
Disclaimer: This article is for educational purposes only and is not investment advice. Please consult a SEBI-registered advisor before making investment decisions.
