PEG ratio

What is PEG ratio?

The PEG ratio is used to find undervalued growth stocks. It is the P/E ratio (price-to-earnings ratio) divided by the growth rate. Considering a good growth stock grows at a rate equal to its P/E, tthe PEG Ratio can be used to identify companies whose past growth rate suggests they may still be undervalued relative to their earnings multiple.

Formula:

Price / EPS / EPS growth

What does PEG ratio mean?

A good PEG ratio is considered to be less than 1. For example, if a stock is priced at $25, EPS is $1, P/E is 25, and the growth rate is 40%, the PEG Ratio is .63.

A stock with a PEG ratio of 1 or greater is growing at the same rate (or less) than its P/E. For example, if a stock is priced at $25, EPS is $1, P/E is 25, and the growth rate is 25%, the PEG ratio is 1.