Free PEG Ratio Calculator
P/E Ratio & Earnings Growth Rate
Enter P/E and growth data
to calculate the PEG ratio
The Price/Earnings to Growth (PEG) Ratio Calculator is an online tool that helps investors quickly compute the PEG ratio—a key metric for stock valuation. By applying the PEG ratio formula, this stock valuation calculator factors in earnings growth to provide a more comprehensive perspective than the standard P/E ratio. When used alongside an investment growth rate calculator, it supports deeper growth‑adjusted analysis.
What Is the PEG Ratio?
The PEG ratio reflects the price an investor is willing to pay for one dollar of current earnings for each percentage point of expected future earnings growth. Unlike the traditional P/E ratio, which only captures current earnings, the PEG ratio incorporates the company’s growth rate, enabling a fairer comparison between firms with different growth profiles.
How to Calculate the PEG Ratio
The fundamental formula is:
To apply this formula, follow these steps:
- Obtain the current stock price (readily available from financial platforms).
- Compute Earnings Per Share (EPS):
- Calculate the P/E ratio:
- Estimate the earnings growth rate: Multiply the decimal by 100 to express it as a percentage (e.g., 0.12 → 12%).
- Determine the PEG ratio:
Worked Example: Company Alpha
Consider a company with these details:
- Stock price = $20.00
- Net earnings = $15,000,000
- Shares outstanding = 10,000,000
- Retention ratio = 60% (0.60)
- ROE = 8% (0.08)
Step A: EPS = 1.50**
Step B: P/E = 1.50 = 13.33
Step C: Growth rate (decimal) = 0.60 × 0.08 = 0.048 → 4.8%
Step D: PEG = 13.33 ÷ 4.8 = 2.78
Company Alpha therefore has a PEG ratio of about 2.78.
Interpreting the PEG Ratio
No single threshold fits all, but many analysts view a PEG ratio near 1 as a sign that the stock is fairly valued relative to its growth. PEG values significantly below 1 may indicate undervaluation, while higher values could suggest overvaluation. However, industry context and company‑specific circumstances must always be considered.
Key Limitations
The PEG ratio has one major blind spot: it fails to incorporate risk. A company might appear to have a low PEG ratio simply because the market perceives it as low‑risk, not because it is genuinely undervalued. Relying solely on the PEG ratio can therefore be misleading. A thorough investment analysis should include debt levels, competitive advantage, cash flow, and broader economic factors.
Use this Price/Earnings to Growth Ratio Calculator as a convenient starting point, but always combine it with other valuation tools to make fully informed decisions.
FAQ
1. What is the PEG ratio and how does it differ from the P/E ratio?
The PEG ratio (Price/Earnings to Growth) extends the P/E ratio by incorporating the expected earnings growth rate. While the P/E only reflects current earnings, the PEG adjusts for growth, allowing investors to compare companies with different growth rates on a more equal basis.
2. How do you calculate the PEG ratio step by step?
First, find the stock price and compute EPS (net earnings divided by shares outstanding). Then calculate the P/E ratio (stock price divided by EPS). Next, estimate the earnings growth rate using retention ratio × ROE, expressed as a percentage. Finally, divide the P/E ratio by that growth rate percentage to obtain the PEG ratio.
3. What does a PEG ratio of 2.78 mean for Company Alpha?
A PEG ratio of 2.78 means investors are paying $2.78 for each $1 of earnings per 1% of expected growth. This suggests the stock may be priced relatively high compared with its growth rate, although a full assessment should also consider industry norms and risk factors.
4. What are the main limitations of the PEG ratio?
The PEG ratio does not account for risk. A low PEG can result from low perceived risk rather than genuine undervaluation. It also ignores debt, competitive dynamics, and macroeconomic influences. Therefore, it should be used alongside other financial metrics, not in isolation.
How to Use
- Choose a calculation method - 'Direct' if you already know the P/E ratio and earnings growth rate, or 'Fundamental' to calculate from stock price, EPS, retention rate, and ROE.
- Enter the required values. In fundamental mode, the P/E ratio and earnings growth rate are auto-calculated from your inputs.
- Read the PEG ratio instantly. A ratio near 1.0 suggests fair valuation, below 1.0 may indicate undervaluation, and above 1.0 may suggest overvaluation.