PEG Ratio
Calculate the PEG ratio to evaluate if a stock is undervalued or overvalued relative to its earnings growth. Free PEG ratio calculator with breakdowns and charts.
About This Calculator
The PEG Ratio Calculator (Price/Earnings to Growth) helps investors evaluate whether a stock's current price is justified by its expected earnings growth. Unlike the standard P/E ratio, which only compares price to current earnings, the PEG ratio incorporates the company's growth rate to provide a more complete picture of valuation. This makes it particularly useful for evaluating growth companies across Indian (NSE/BSE), US (NYSE/NASDAQ), and UK (LSE) markets.
The PEG ratio is calculated in three steps. First, compute the P/E ratio by dividing the stock price by earnings per share (EPS). Second, calculate the earnings growth rate by multiplying the retention rate (percentage of earnings reinvested) by the return on equity (ROE). Finally, divide the P/E ratio by the earnings growth rate to get the PEG ratio. A PEG ratio of 1 suggests fair value, below 1 indicates undervaluation, and above 2 suggests overvaluation.
Regional notes: Investors in India use the PEG ratio for NSE and BSE-listed growth companies, particularly in IT, pharma, and manufacturing sectors. US investors rely on it for S&P 500 and NASDAQ growth stocks, especially in technology and healthcare. UK investors apply it to FTSE 350 companies in growth sectors. The same general thresholds (below 1 undervalued, around 1 fair, above 2 overvalued) apply across all markets, though industry-specific variations exist. The PEG ratio is most reliable for companies with positive earnings and sustainable growth rates between 5% and 25%.
Frequently Asked Questions
What is the PEG ratio?
The PEG ratio (Price/Earnings to Growth) measures a stock's valuation by comparing its P/E ratio to its expected earnings growth rate. It helps investors determine if a stock's price is fair relative to its growth prospects. A PEG ratio below 1 typically suggests the stock is undervalued, while a ratio above 2 may indicate overvaluation.
How is the PEG ratio calculated?
The PEG ratio is calculated by dividing the P/E ratio by the earnings growth rate. First, compute the P/E ratio by dividing the stock price by earnings per share (EPS). Then multiply the retention rate by the return on equity (ROE) to get the earnings growth rate. Finally, divide the P/E ratio by the growth rate. For example, a stock with a P/E of 20 and a growth rate of 10% has a PEG of 2.0.
What is a good PEG ratio?
A PEG ratio of 1 is considered fair value, meaning the stock price matches its expected growth. Below 1 indicates the stock may be undervalued relative to its growth prospects. Between 1 and 2 is generally acceptable, while above 2 may suggest the stock is overvalued. However, PEG ratio interpretation varies by industry and market conditions. Investors in India, the US, and the UK use the same general thresholds.
What is the difference between P/E ratio and PEG ratio?
The P/E ratio only compares stock price to current earnings, ignoring growth. The PEG ratio improves on this by incorporating the expected earnings growth rate. Two companies may have the same P/E ratio, but the one with higher growth will have a lower PEG ratio, making it potentially more attractive. The PEG ratio therefore provides a more complete picture of valuation.
Can the PEG ratio be negative?
Yes, the PEG ratio can be negative if the company has negative earnings or a negative growth rate. However, a negative PEG ratio is not meaningful for valuation purposes. Investors should avoid using the PEG ratio for companies with negative earnings or declining growth, and instead use other valuation metrics like price-to-sales or discounted cash flow analysis.
What are the limitations of the PEG ratio?
The PEG ratio has several limitations. It relies on estimated future growth rates which may be inaccurate. It does not account for risk, debt levels, dividend policy, or competitive advantages. The ratio assumes linear growth which rarely occurs in practice. Different industries have different typical PEG ratios. Investors should use the PEG ratio alongside other metrics like ROE, debt-to-equity, and free cash flow for comprehensive analysis.
How do I find the retention rate for a stock?
The retention rate (or plowback ratio) is the percentage of earnings retained by the company rather than paid as dividends. It is calculated as 1 minus the dividend payout ratio. For example, if a company pays 40% of earnings as dividends, the retention rate is 60%. You can find dividend and earnings data in company financial statements, Yahoo Finance, Bloomberg, or annual reports (10-K for US companies).
What is the PEG ratio used for in India, US, and UK markets?
The PEG ratio is used universally across Indian (NSE/BSE), US (NYSE/NASDAQ), and UK (LSE) stock markets to evaluate growth stocks. In India, it is commonly used for mid-cap and small-cap stocks with high growth potential. US investors use it widely for tech and growth stocks in the S&P 500. UK investors apply it to FTSE 350 companies. The standard threshold of 1 for fair value applies across all markets.