PEG Ratio - Price/Earnings to Growth Ratio

The PEG or price-earnings to growth ratio is a valuation ratio used along with the P/E ratio, in stock analysis. It calculates the price of a stock in relation to the earnings per share, and the projected growth of the company. The PEG ratio is calculated as:

PEG ratio = Price to Earnings ratio/ Annual EPS growth
Note: The expected growth rate could be for the next 1 year or 5 years.


Understanding the PEG Ratio

An investor can use the PEG ratio to determine if a stock is overvalued or underpriced. One can use the PEG ratio as follows:
PEG ratio > 1 implies that the stock is overvalued. It simply means that the company.s future earnings is not going to grow much and the stock may undergo a correction in price.
PEG ratio = 1 implies that the stock is fairly valued given the expected growth rate.
PEG ratio < 1 means the stock is undervalued as the markets are currently underestimating growth.
Negative PEG ratio: This could be the case where the current earnings are negative, or the future earnings are going to decline.
An Example: Say 2 companies A and B have a P/E ratio of say 40 and 10, with earnings growth being projected at 45% and 2% respectively. We arrive at a PEG ratio of 0.88 for company A and 5 for company B. We see that even though company A has a high PE ratio of 40, considering the PEG ratio it is undervalued as it has huge growth potential.


PEG Ratio for Tech Stocks

CompanyP/E Ratio (2014 estimates)Forecast 12 Month Forward PEG Ratio
Amazon266.368.3
Google24.671.39
Akamai24.612.11
Source:Nasdaq
What we see here is that Amazon is overpriced not only when we take into account the P/E ratio, but also the PEG ratio. We have always stated that Amazon is overpriced which is reflected in our analysis of the stock.


Things to remember while using the PEG ratio

  • The PEG ratio relies on projections or future earnings which may not always be correct.
  • The PEG ratio gives accurate results for growth companies. It gives inaccurate results for stocks which pay high dividend.

Top Stock Gainers

show top losers
CompanyPriceChange (%)
Sarepta Therapeutics (SRPT)143.9338.69 (36.76%)
Neptune Tech. & Bio. (NEPT)3.230.78 (31.84%)
Foundation Medicine (FMI)136.7530.3 (28.46%)
First Connecticut Bancorp (FBNK)31.155.15 (19.81%)
Catalyst Biosciences (CBIO)10.461.35 (14.82%)
Napco Security Technologies (NSSC)14.651.5 (11.41%)
Liberty Tax (TAX)9.150.85 (10.24%)
Top gainers from NASDAQ & NYSE ( Above $100M Market Cap )
* As of Jun 20, 2018
CompanyPriceChange (%)
PTC Therapeutics (PTCT)33.2414.64 (30.58%)
Green Brick Partners (GRBK)10.651.53 (12.57%)
TELLURIAN INC (TELL)9.561.32 (12.13%)
Athersys (ATHX)2.060.25 (10.82%)
Systemax (SYX)35.423.97 (10.08%)
Lee Enterprises (LEE)2.250.25 (10%)
ELOXX PHARMACT (ELOX)19.21.65 (7.91%)
Top losers from NASDAQ & NYSE ( Above $100M Market Cap )
* As of Jun 20, 2018