PEG ratio.
In plain English
The PEG ratio takes a P/E multiple and divides it by the expected annual earnings growth rate stated as a whole number. The reasoning is that a fast-growing company deserves a higher multiple than a flat one, so the raw P/E alone is an unfair comparison. A PEG near 1.0 is often described as growth and price roughly in balance, though that rule of thumb has no formal backing. The ratio inherits every weakness of the growth estimate feeding it, and growth forecasts are frequently wrong. It also breaks down entirely for companies with negative or near-zero growth.
01Why it matters
It gives you a way to compare a slow steady company against a fast-growing one without automatically concluding that the cheaper-looking multiple is the better business.
02The math, step by step
A stock trades at 30 times earnings and analysts expect 20 percent annual earnings growth. 30 divided by 20 is a PEG of 1.5. A second stock at 12 times earnings with 6 percent expected growth has a PEG of 2.0, so the lower P/E is the pricier one on this measure.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
P/E prices earnings as they stand. PEG adjusts that price for expected growth and therefore depends on a forecast. A low PEG is not evidence of a bargain; it is evidence that someone's growth estimate is high relative to the multiple.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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