What the PEG ratio is
The PEG ratio, short for price/earnings-to-growth, takes a stock's P/E ratio and divides it by how fast the company's earnings are growing.
It exists because the P/E ratio has a blind spot. A fast-growing company usually has a higher P/E than a slow one, so on P/E alone it always looks expensive. PEG asks a fairer question: how much are you paying for each point of growth?
You'll need two ideas first. Earnings per share (EPS) is a company's profit divided by its number of shares. The P/E ratio is the share price divided by EPS. If either is new, start here:
The formula
Enter the growth rate as a whole number. Growth of 20% goes in as 20, not 0.20. Otherwise a PEG of 1.25 turns into 125.
Match your inputs. A trailing P/E uses the last 12 months of reported earnings, so pair it with past growth. A forward P/E uses estimates for the next 12 months, so pair it with expected growth. Schwab's guide to the ratio makes the same point.
Worked example: BrightPath
BrightPath Software is a made-up company. Its shares trade at $60. It earned $2.40 per share over the last 12 months, up from $2.00 the year before.
| Step | What you do | Result |
|---|---|---|
| 1 | Find the share price | $60.00 |
| 2 | Find EPS for the last 12 months | $2.40 |
| 3 | P/E = $60.00 ÷ $2.40 | 25 |
| 4 | Growth = ($2.40 − $2.00) ÷ $2.00 | 20% |
| 5 | PEG = 25 ÷ 20 | 1.25 |
A PEG of 1.25 means you're paying 1.25 points of P/E for every point of earnings growth. That's a little above 1. It doesn't say the stock will rise or fall. It says the price already assumes a fair amount of growth.
Flip it around: at 20% growth, a PEG of exactly 1 needs a P/E of 20. That's a price of $48 (20 × $2.40).
PEG calculator
The defaults are BrightPath's numbers. Try pushing EPS below zero or growth to zero to see where the ratio stops working.
PEG calculator
Change the price, EPS and growth rate. Watch where the PEG lands on the scale and what the verdict says.
You're paying 1.25 points of P/E for each point of growth, a premium over the PEG of 1 line. At the same growth, a price of $48.00 would put the PEG at exactly 1.
How to read a PEG ratio
These bands are rules of thumb, not laws. Treat them as a first filter before deeper research.
| PEG | Common reading | What to check next |
|---|---|---|
| Negative or n/a | Not meaningful | There's a loss or earnings are shrinking. Use other measures. |
| Below 1 | Growth looks cheap | Is the growth estimate realistic, and will it repeat? |
| Around 1 | Roughly in line | Lynch's benchmark for a fairly priced stock. |
| 1 to 2 | Paying a premium | Common for steady, high-quality companies. Compare with peers. |
| 2 and above | Pricey for its growth | Lynch saw a P/E at twice the growth rate as a bad sign. |
Experts don't fully agree on the cut-offs. Lynch, and a CFA Institute blog post that builds on his rule, treat 1 as the fair line. Others, such as Chuck Carnevale of F.A.S.T. Graphs, find PEG most useful for fast growers, roughly 15% earnings growth or more, and use different yardsticks for slower companies. Schwab adds that it can mislead for mature, cyclical and extremely fast-growing companies.
Normal ranges also vary by industry, so compare a company with its peers and its own history. For context, Schwab, citing Yardeni Research, put the S&P 500's long-term average PEG at 1.32 as of April 2026. A PEG above 1 is normal for the market as a whole.
Why the growth number matters most
Price and EPS are reported facts. Growth is usually an estimate, and the PEG reacts strongly to it, especially when growth is small.
How much does the growth estimate matter?
Hold the P/E steady and move the growth rate. Watch how steeply the PEG climbs when growth gets small.
A 5-point miss on growth (to 15%) moves the PEG from 1.25 to 1.67, a 33% jump, with no change in price. The growth estimate matters more than any other input.
Trailing, forward and other versions
There's no single official PEG. Data providers make different choices, so always check which version you're looking at.
Trailing PEG
Trailing P/E divided by earnings growth over the past year. It uses reported results, but it looks backward. BrightPath's trailing PEG is 1.25.
Forward PEG
Forward P/E divided by expected growth. If analysts expect BrightPath to earn $3.00 next year, its forward P/E is 20 ($60 ÷ $3.00), expected growth is 25%, and its forward PEG is 0.80.
Long-term PEG
Uses three- to five-year growth estimates. Schwab notes these are less distorted by one-off events, but long forecasts change often and can be too optimistic or too gloomy.
Dividend-adjusted PEG (PEGY)
P/E divided by growth plus dividend yield. It gives credit for cash paid out to shareholders, which plain PEG ignores.
Lynch's upside-down version
Lynch actually described growth plus dividend yield, divided by P/E. In his version higher is better: he called below 1 poor, 1.5 okay, and 2 or more what he was really looking for.
BrightPath shows why the label matters. Same stock, same day: a trailing PEG of 1.25 and a forward PEG of 0.80. Both are correct. They answer different questions.
Same P/E, different story
PEG earns its keep when two stocks look identical on P/E. It can also hide differences that P/E and growth alone don't show.
Same P/E, different story
Pick a scenario. Compare what P/E says with what PEG says about two made-up companies.
SteadyCo
RapidCo
Both trade at 20 times earnings, so P/E calls them equally priced. PEG disagrees: SteadyCo costs 4.00 points of P/E per point of growth, RapidCo only 0.80. That gap is only real if RapidCo's 25% growth holds up.
Reading a PEG ranking you see online
Charts that rank a whole sector by PEG are popular on social media. They often come with a rule like "below 1 means growth is mispriced, above 2 is the danger zone." Those are the same bands this guide uses, but they're starting points, not verdicts.
A ranking compares companies in one industry, which is the right way to use PEG. But a single bar hides the growth estimate behind it. The very lowest bars in a cyclical industry deserve the most suspicion, not the least.
Made-up chipmakers ranked by multi-year PEG
Tap a bar to see what might sit behind the number.
MemoryMax PEG 0.20 · Below 1
Memory chips. P/E of 12 ÷ expected growth of 60% = 0.20.
Memory prices swing with supply and demand. Earnings can jump in an upswing, which makes expected growth huge and the PEG tiny.
Question to ask: Is this the top of a cycle? A very low PEG near peak growth can fade fast when prices turn.
Before you take anything from a chart like this, run through these questions.
Before you trust a PEG ranking
Tick each one you can answer for the chart in front of you.
0 of 6 answered. Each gap is a reason to treat the ranking as rough until you check.
Where the PEG ratio came from
The ratio is credited to Mario Farina, who described it in his 1969 book A Beginner's Guide to Successful Investing in the Stock Market. It became widely known through Peter Lynch, the former manager of Fidelity's Magellan Fund, in his 1989 book One Up on Wall Street.
Lynch wrote that "the P/E ratio of any company that's fairly priced will equal its growth rate." That sentence is where the idea of a PEG of 1 as fair comes from. He also suggested working out growth yourself from past annual earnings, and admitted that future growth is anyone's guess.
A CFA Institute blog post notes a quirk that purists dislike: PEG divides a multiple by a percentage. It's a quick yardstick, not a law of finance.
Limitations to take care of
Only as good as the growth number
Forward estimates can be too optimistic or too pessimistic, and analysts revise them often. A wrong estimate gives a confident-looking but wrong PEG.
Growth doesn't last forever
PEG uses one growth rate. It can't tell you how long that rate will last, or what growth looks like five or ten years out.
Breaks at low or negative growth
Tiny growth makes the PEG explode, zero growth makes it impossible to calculate, and shrinking earnings make it meaningless. Mature, slow-growing companies are poorly served.
One-off jumps and cycles
A rebound from a bad year, or a cyclical company at the top of its cycle, can show growth that won't repeat. The PEG then looks far cheaper than it should.
Ignores debt, cash flow and dividends
Two companies with the same EPS growth can need very different amounts of borrowing and investment to get there. Check free cash flow and the balance sheet, and use PEGY for dividend payers.
Extreme growth is hard to price
The CFA Institute blog notes that for companies growing extremely fast, above about 100% a year, PEG tends to value them lower than a detailed discounted cash flow model would.
Spot the trap
Most PEG mistakes come from reading too much into the number. Test yourself.
Spot the trap
One statement in each round is misleading. Round 4 uses the chipmaker chart above. Tap the one you think it is.
Common mistakes
Mixing trailing P/E with forward growth
A backward-looking P/E divided by a forward-looking growth estimate compares two different periods. Keep both inputs trailing or both forward.
Treating a PEG below 1 as a buy signal
A low PEG says the price looks low relative to one growth estimate. If that estimate is cut, the PEG rises overnight without the price moving.
Trusting a one-year growth spike
Earnings bouncing back from a weak year can show 100% growth or more. That kind of jump rarely repeats, so a PEG built on it flatters the stock.
Using PEG on losses or shrinking earnings
A negative PEG isn't extra cheap. It means the ratio doesn't apply. Switch to revenue growth, cash flow or price-to-sales.
Comparing PEGs from different sources
One site may use one-year forward growth, another a five-year estimate, another past growth. Compare companies using the same source and the same definition.
Forgetting dividends and debt
Plain PEG ignores dividends, so payers look pricier than they are. It also ignores how much debt funded the growth.
The PEG ratio and the news
PEG moves whenever any of its inputs move: the price, the earnings, or the growth estimate. News affects all three.
An earnings report updates trailing EPS, so the trailing P/E and growth rate both reset when results come out. Guidance from management in the press release often leads analysts to revise their estimates, which changes the forward PEG even if the price doesn't move. Analyst rating changes often come with new earnings estimates too. And a sharp price move after any announcement changes the P/E straight away.
On Stockwhiz, check the latest earnings report (actual EPS against estimates), the guidance in the company's press release, and recent analyst rating changes before relying on a PEG you've seen quoted. If the estimate behind it is older than the latest report, it may already be out of date.
Check yourself
A stock trades at $45. EPS over the last 12 months was $1.50, and earnings grew 15%. What's its PEG ratio?
Company A has a P/E of 12 and 4% growth. Company B has a P/E of 30 and 30% growth. On PEG alone, which looks cheaper relative to its growth?
A stock has a P/E of 18, and its earnings fell 10% last year. A website shows a PEG of −1.8. What's the best reading?
Frequently asked questions
Many investors treat a PEG around 1 as fairly valued, below 1 as cheaper relative to growth, and above 1 as paying a premium. These are rules of thumb. Normal ranges vary by industry, so compare a company with its peers and its own history.
The P/E ratio compares the share price with earnings. The PEG ratio divides the P/E by the earnings growth rate, so it also accounts for how fast those earnings are growing.
It means the company is losing money or its earnings are shrinking. In both cases the PEG isn't meaningful, and it isn't a sign the stock is cheap.
Either works if the inputs match. Trailing PEG uses reported results but looks backward. Forward PEG looks ahead but relies on estimates that can be wrong. Many investors check both.
They use different growth figures: past growth, next year's estimate, or a three- to five-year estimate. Some also use adjusted earnings. Check the definition before comparing.
Sources and further reading
Schwab covers the calculation and its limits; CFA Institute discusses Lynch's rule of thumb. Examples on this page are fictional.
Stockwhiz Guides is for education only and isn't investment advice. Examples use made-up companies unless marked as live data.