Sign In

 Content Editor

What is the PEG ratio?

The Price/Earnings-to-Growth (PEG) ratio goes a step ahead of the P/E ratio,dividing the P/E ratio by the growth rate of its earnings for a specified period.The PEG ratio draws a relationship between the P/E ratio and the projected earnings growth rate over a specified period, say 1 year, 2 years or 3 years, and hence provide a more informed view of the stock.

How to calculate the PEG ratio?

PEG Ratio =

Price/EPS
-------​-------
EPS Growth

The components of the PEG ratio formula are​

- Market Price of stock​

- Earnings per share (EPS) = Total earnings/ Number of shares

- EPS Growth = Projected growth available on financial websites or {(EPS of this year/EPS of last year)-1}

For example

Consider the following details of Growth Ltd for FY 21-22:

Earnings = Rs.10 lakh

Price = Rs 12 per share

Number of shares = 2 lakh

EPS growth last year was 2%

Projected EPS = 3%.

EPS = (10,00,000/2,00,000) = Rs. 5​

P/E ratio is 12/5 = 2.4

The PEG ratio is 2.4/3 = 0.8

In the same example, if the EPS for this year, say Rs 5 and last year, say Rs 4.5, were given, then that can be used to derive the EPS growth percentage by using the formula {(EPS of this year / EPS of Previous year)-1} = {(5/4.5)-1} = 11%

What does this ratio mean?

Experts believe a PEG ratio equal to 1.0 denotes a fairly valued stock. A ratio below 1.0 is an undervalued stock and above 1.0 indicates an overvalued stock. So in the above example, the stock is undervalued compared to its expected growth, and the investors are paying less per unit of earnings growth. To what extent it is undervalued must be measured based on the industry, company type, etc.

Pros and Cons of the PEG ratio

The PEG ratio is a forward-looking metric and considers the stock’s expected profits rather than past performance. PEG ratio factors in the company’s growth rate compared to the P/E ratio, which requires a separate analysis by investors to factor in the company’s growth. For a complete analysis, the ratio must be analysed with financial reports.

The only challenge with the PEG ratio is that growth rates aren’t always accurate or easily available. The PEG ratio considers the EPS growth rate based on a certain number of years. Since this could vary, PEG ratios cannot be used for comparison as the growth rates will differ. Also, earnings forecasts tend to be less accurate when spread over a longer period.

Comparison of PEG ratio and P/E ratio

The major factors of distinction between the P/E ratio and the PEG ratio are as follows:

Particulars

P/E ratio

PEG Ratio

Components

Price and Earning per Share

Price, Earnings per share and EPS growth

Popularity

More Popular and widely used

Lesser known

Types

There are two types of P/E ratios - trailing and forward

There is only one type of PEG ratio

Interpretation

The higher the P/E ratio, the more the market is ready to pay for Re. 1 of its earnings.

The PEG ratio must be 1, which denotes equilibrium, so the stock is neither undervalued nor overvalued.

Both ratios aid in the fundamental analysis of stocks and help make sound financial decisions. However, they must not be used in isolation for making an informed decision regarding the stock’s value.

Frequently Asked Questions (FAQs)

What Is considered to be a good PEG Ratio?

A PEG ratio of 1 indicates equilibrium, meaning that the earning potential and perceived value of a stock's worth are in sync.

What Is Better: A Higher or Lower PEG Ratio?

A higher PEG ratio means that the markets have overvalued the stock, and a low PEG ratio means that the stock has been undervalued. Hence, a lower PEG ratio is better as the stock may have more potential than perceived.

What Does a Negative PEG Ratio indicate?

A negative PEG ratio indicates that the stock’s present income is negative or that future earnings are expected to drop, indicating a negative growth pattern.

What does a PEG ratio of 2 mean?

A PEG ratio higher than 1 denotes the overvaluation of the stock and is not considered favourable. So a stock with a PEG ratio of 2 is definitely overvalued.

What is the P/E ratio vs PEG?

The P/E ratio generally indicates a stock’s past performance and does not consider the growth potential of the stock. The PEG ratio considers the stock’s growth potential andcould be useful in financial decision-making.

​​
Disclaimer:
This is an investor education and awareness initiative by Nippon India Mutual Fund.
Helpful information for investors: All Mutual Fund investors have to go through a one-time KYC (know your Customer) process. Investors should deal only with registered mutual funds, to be verified on SEBI website under 'Intermediaries/ Market Infrastructure Institutions'. For redressal of your complaints, you may please visit www.scores.gov.in . For more info on KYC, change in various details & redressal of complaints, visit mf.nipponindiaim.com/investoreducation/what-to-know-when-investing This is an investor education and awareness initiative by Nippon India Mutual Fund.

The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document.
Language Disclaimer:
While utmost care has been taken in translating the article into respective regional language(s), in case of any confusion or difference of opinion, article available in English language should be deemed as final. The article provided herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional advice for the readers. The document has been prepared on the basis of publicly available data/ information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of loss of profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this article.
"ABOVE ILLUSTRATIONS ARE ONLY FOR UNDERSTANDING, IT IS NOT DIRECTLY OR INDIRECTLY RELATED TO THE PERFORMANCE OF ANY SCHEME OF NIMF. THE VIEWS EXPRESSED HEREIN CONSTITUTE ONLY THE OPINIONS AND DO NOT CONSTITUTE ANY GUIDELINES OR RECOMMENDATION ON ANY COURSE OF ACTION TO BE FOLLOWED BY THE READER. THIS INFORMATION IS MEANT FOR GENERAL READING PURPOSES ONLY AND IS NOT MEANT TO SERVE AS A PROFESSIONAL GUIDE FOR THE READERS."

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
Top