Investiční slovník
PEG Ratio: Price-to-Earnings-to-Growth Explained
Key takeaways
- The PEG ratio divides a company's P/E ratio by its expected earnings growth rate — giving a more contextual view of valuation.
- A PEG below 1 is often considered cheap, above 1 expensive — but context and sector always matter.
- PEG is most useful when comparing growth companies whose high P/E on its own says little.
- The downside of PEG is its dependence on future earnings estimates, which are always uncertain.
- Never use PEG as the sole indicator — always combine it with other metrics.
The PEG ratio (Price/Earnings to Growth) is a valuation metric that divides the classic price-to-earnings (P/E) ratio by the expected annual earnings growth rate of a company — answering the question of whether a high P/E is "paid for" or "overpaid".
How PEG Is Calculated
The formula is straightforward:
- PEG = P/E ÷ annual earnings growth rate (%)
- Example: a company has a P/E of 30 and expected annual earnings growth of 30% → PEG = 1
- Another company has a P/E of 15 and expected growth of 5% → PEG = 3
In this comparison, the first company — despite its higher P/E — is cheaper than the second if it actually delivers its growth. The PEG concept was first popularized by investor Peter Lynch in his book "One Up on Wall Street".
How to Interpret PEG
The rule of thumb says: PEG below 1 = potentially undervalued stock, PEG around 1 = fair valuation, PEG above 1 = possibly overpriced. This rule is rough — different sectors and market conditions have different norms. Technology companies traditionally trade at a higher PEG than banks or utilities.
When PEG Is Useful and When It Isn't
PEG is most useful when comparing companies in similar sectors with different growth rates. It helps distinguish an "expensive" company from an "expensive company that deserves it". For mature companies with zero or negative growth, PEG makes no sense. A passive investor in index ETFs doesn't need PEG — but it helps them understand why analysts debate the valuations of growth stocks. The basics of valuation concepts and P/E are covered in the investment dictionary.
FAQ
What is the PEG ratio?
A valuation metric that divides a stock's P/E ratio by its expected earnings growth rate (as a percentage). It gives context to a high P/E — showing whether the premium valuation is justified by the company's growth rate.
How is PEG interpreted?
As a guideline: PEG below 1 = potentially undervalued stock, PEG = 1 = fair valuation, PEG above 1 = possibly overpriced. This applies only within comparable companies and sectors — it is not an absolute rule.
Why not use PEG alone?
Because it depends on an estimate of future earnings, which is always uncertain. Analysts can be too optimistic or too pessimistic. PEG is one tool in the toolkit, not a self-sufficient filter for finding cheap stocks.