What is PEG Ratio?
The P/E ratio divided by the earnings growth rate.
Formal Definition
The Price/Earnings-to-Growth (PEG) ratio divides a stock's P/E ratio by its expected annual earnings growth rate. By adjusting valuation for growth, it lets investors compare fast growers with slow ones on a fairer basis. A PEG near 1.0 is often viewed as reasonably priced, below 1.0 as potentially cheap for its growth.
In Simple Terms
It improves on the plain P/E by factoring in how fast a company is growing. A pricey-looking stock can be a bargain if its profits are expanding quickly, and PEG captures that.
Example
A stock with a P/E of 30 growing earnings at 30% a year has a PEG of 1.0, suggesting its rich P/E is justified by growth.