P/E alone says nothing about growth — the PEG ratio divides P/E by the expected earnings growth rate to judge valuation relative to growth.
How it works
The P/E ratio divided by the expected annual EPS growth rate (as a whole number) gives the PEG ratio — a value at or below 1.0 is commonly read as potentially undervalued relative to growth.
What this does not include
PEG relies entirely on the accuracy of the growth rate assumption — an overly optimistic growth estimate makes a stock look artificially cheap on a PEG basis, a real limitation of the metric.
How to use this calculator
- Enter the P/E ratio and expected annual EPS growth rate.
A worked example
A P/E ratio of 20 with a 10% expected growth rate: PEG ratio = 20 ÷ 10 = 2 — often considered expensive relative to growth.
A P/E ratio of 8 with the same 10% growth rate: PEG ratio = 0.8 — below 1, often considered attractively priced relative to growth.
What the variables mean
| Variable | Meaning |
|---|---|
| P/E ratio | Price-to-earnings ratio |
| Growth rate | Expected annual earnings growth rate, as a percentage |
Edge cases worth knowing
PEG adjusts P/E for growth, which plain P/E can’t do on its own. A high P/E paired with high growth can still yield a reasonable PEG, while the same P/E with low growth signals overvaluation — this is why the second example’s lower P/E scores “good” while the first’s higher P/E scores “warn” at the identical growth rate.
Zero growth rate makes the PEG ratio undefined — there’s no growth to divide the P/E by, so the calculator returns no result.
Frequently asked questions
Who popularized the PEG ratio?
It’s widely attributed to investor Peter Lynch, who used it as a quick screening tool in his investing approach described in “One Up on Wall Street.”
Is a PEG ratio below 1.0 always a buy signal?
No — it’s a screening heuristic, not a guarantee; a low PEG could also reflect a market correctly pricing in risks the raw growth-rate assumption doesn’t capture.
Does PEG work for non-growth stocks?
It’s less useful for slow-growth or no-growth companies, since dividing by a very small (or zero) growth rate produces an extreme or undefined PEG ratio.
