Valuation
PEG ratio
The P/E ratio divided by the expected earnings growth rate, to compare companies growing at different speeds.
How it works
A PEG of 1 is the traditional rough marker of fair value: a company growing at 20% a year trading on a P/E of 20.
Its appeal is that it puts a fast grower on a high multiple and a slow one on a low multiple on a comparable footing.
Where it misleads people
It rests entirely on a growth forecast, and it treats growth as linear and equally valuable regardless of how long it lasts or what it costs to achieve. Growth bought with heavy capital spending is not the same as growth that needs none.
Formula
PEG = P/E ÷ expected annual earnings growth rate (as a whole number)Related terms
- P/E ratioThe share price divided by earnings per share — roughly, how many years of current profit you are paying.
- Forward P/EPrice divided by the earnings analysts expect next year, rather than last year’s actual earnings.
- Earnings growthThe rate at which a company’s profits are increasing, usually measured per share and per year.
- Return on invested capitalOperating profit after tax as a percentage of all the capital invested in the business, debt and equity alike.
More in Valuation
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.