PEG Ratio Calculator
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Evaluating fast-growing companies using standard Price-to-Earnings (P/E) ratios often makes great companies look deceptively expensive. A stock with a P/E ratio of 30 might actually be a bargain if its earnings are growing at 40% per year, whereas a stock with a P/E of 12 growing at 2% might be an expensive value trap. Popularized by legendary fund manager Peter Lynch, the PEG Ratio (Price/Earnings to Growth) adjusts P/E valuation relative to earnings growth speed.
Our free PEG Ratio Calculator computes a stock’s PEG ratio to help investors implement GARP (Growth at a Reasonable Price) stock selection strategies.
How to Calculate the PEG Ratio
The PEG ratio is calculated by dividing a stock’s Price-to-Earnings (P/E) ratio by its annual percentage Earnings Per Share (EPS) growth rate.
The PEG Ratio Formula:
PEG Ratio = P/E Ratio / Annual EPS Growth Rate (%)
Sub-Formula Component:
P/E Ratio = Current Share Price / Trailing Twelve Months EPS
Note: In the PEG calculation, the growth rate is entered as a whole integer (e.g., 25% growth is entered as 25, not 0.25).
Step-by-Step GARP Valuation Example
Imagine an expanding technology firm trades at a stock price of $50.00 with reported EPS of $2.50 (yielding a P/E ratio of 20.0x). Consensus analyst estimates project annual EPS growth of 25.0% per year.
Let’s calculate the stock’s PEG ratio:
P/E Ratio = $50.00 / $2.50 = 20.0x
PEG Ratio = 20.0 / 25.0 = 0.80
| PEG Ratio Range | Valuation Rating | Peter Lynch Benchmark | GARP Investor Recommendation |
|---|---|---|---|
| Under 1.00 (e.g., 0.80) | Undervalued / Bargain | Growth rate exceeds P/E ratio | Strong GARP Buy Target |
| Equal to 1.00 | Fairly Valued | P/E perfectly matches growth rate | Hold / Fair Price |
| 1.00 to 2.00 | Slight Premium | Acceptable for top mega-cap moat stocks | Use caution; monitor growth retention |
| Over 2.00 | Overvalued | P/E significantly outpaces growth rate | Overpriced growth stock |
Frequently Asked Questions (FAQ)
What is a good PEG ratio for growth stocks?
According to Peter Lynch, a PEG ratio below 1.00 indicates that a stock is undervalued relative to its growth potential. A PEG ratio of 1.00 represents fair value, while ratios above 2.00 suggest the stock is overvalued.
What is the difference between Trailing PEG and Forward PEG?
Trailing PEG uses historical past 12-month EPS growth rates. Forward PEG uses projected consensus analyst EPS growth estimates over the next 3 to 5 years, which is preferred for forward-looking equity valuation.
Why does the PEG ratio fail for dividend-heavy stocks?
The standard PEG ratio ignores dividend cash returns. To value mature dividend-paying growth stocks, investors use the PEGY Ratio, which adds dividend yield to the earnings growth rate: PEGY = P/E / (Growth Rate + Dividend Yield).