What it measures
The PEG ratio is the P/E ratio (price-to-earnings) divided by the expected earnings growth rate, written as a whole number. A forward P/E of 30 with 30% expected EPS growth has a PEG of 1.0.
It answers a single question: am I paying a fair price for this growth? For long-term stock pickers it is often the most important single number on the page.
The bands
| PEG | Reading |
|---|---|
| Below 1 | Growth is cheap relative to price |
| 1 to 2 | Fairly priced |
| Above 2 | Paying up for growth |
| Above 3 | Priced for perfection |
Two examples
| Company A | Company B | |
|---|---|---|
| Forward P/E | 26 | 11 |
| Expected EPS growth | 32% | 4% |
| PEG | 0.81 | 2.75 |
Company B looks cheap on P/E and is expensive on PEG. Company A looks expensive on P/E and is cheap on PEG. Over several years, Company A's earnings are likely to grow into its price; Company B's are not.
Using it
- Use the forward PEG, based on forward P/E and forward EPS growth. See forward PEG and P/E to growth in the glossary.
- Great companies with a PEG above 2 go on a watchlist until the ratio comes back toward 1.
- Rank companies by PEG within a screen; see Stock screening and scoring.
Caveats
- It depends on growth estimates, which can be wrong.
- It ignores the balance sheet; a low PEG with heavy debt is still risky.
- It does not work for companies with falling or negative earnings.
- Very high growth rates rarely last; a PEG built on 60% growth needs extra scepticism.
Questions
Why use PEG instead of P/E?
Because P/E alone punishes fast growers and flatters slow ones. PEG asks whether the price is fair for the growth you get, which is the real question.
Can PEG be negative?
Yes, if earnings are expected to fall or the company loses money. A negative PEG is not "cheap"; it means the ratio does not apply.
See also
- P/E ratio (price-to-earnings) What the P/E ratio means, trailing versus forward P/E, what counts as high or low, and why P/E alone can mislead without growth.
- EPS growth (TTM and forward) How to read earnings per share growth, why it can outpace revenue through operating leverage, and how buybacks can flatter it.
- Portfolio vs watchlist Why keeping a portfolio of stocks you own separate from a watchlist of stocks you are studying leads to better decisions and fewer impulse buys.
- Stock screening and scoring How to screen thousands of stocks down to a short list, and how a percentile-based scoring model ranks companies on growth, valuation and balance sheet.
Pages that link here: A long-term investing philosophy, Building a research watchlist, Building your investing knowledge, Finviz screener guide, Fundamental analysis, Fundamentals checklist, Growth, value and dividend investing, How to research a company, Hype and market sentiment, If-then signals, The 52-week range, The double-or-halve test
Last updated September 30, 2026. Education only, not investment advice.