What is the Price/Earnings to Growth (PEG) Ratio?

Introduction

You're trying to tell if a high-priced stock is justified, so the Price/Earnings to Growth (PEG) ratio gives a growth-adjusted valuation by taking the P/E (price-to-earnings) and dividing it by expected EPS growth (percent). It helps compare fast and slow growers: for example, using 2025 forecasts, a company trading at a P/E of 25 with 2025 EPS growth of 20% yields a PEG of 1.25 - here's the quick math: 25 ÷ 20 = 1.25. PEG shows how much you pay for each unit of expected earnings growth. What this hides: forecasts can be wrong and a single-year growth rate is noisy, so use multi-year or sensitivity checks; defintely verify the 2025 estimate source. Next step: You - model a 2025 PEG sensitivity table by Friday.

Key Takeaways

• PEG = P/E ÷ expected EPS growth (in percent); it measures how much you pay for each unit of expected earnings growth.
• Rule of thumb: PEG ≈ 1 ≈ fair value; <1 may indicate undervaluation and >1 may indicate premium-adjust for sector norms.
• Prefer forward, multi-year (3-5 yr) consensus EPS growth and use the same timeframe for P/E and growth for consistency.
• Limitations: invalid with negative earnings/growth, sensitive to biased estimates, and distorted by accounting one-offs or buybacks.
• Use PEG as a screening tool alongside DCF/EV‑EBITDA and run sensitivity checks (±2-3 percentage points); compute 3‑year forward PEGs for top 20 names and report by Friday.

What PEG measures and the formula

You want a quick, comparable way to tell if a stock's P/E (price/earnings) is justified by its expected growth; PEG does exactly that by dividing P/E by expected EPS growth (in percent).

Direct takeaway: PEG = P/E ÷ expected annual EPS growth (percent), so a lower PEG means you pay less per unit of expected growth.

Formula

PEG equals the company Price/Earnings ratio divided by the company's expected annual EPS growth rate expressed as a percent. Put plainly: PEG = P/E ÷ Growth(%) .

Practical steps to calculate:

• Get the P/E: use current price ÷ the EPS metric you choose (forward P/E uses next-12-month or next-fiscal EPS; trailing P/E uses TTM EPS).
• Pick the growth input: use consensus annual EPS growth for the next 3-5 years (expressed as a percent).
• Compute PEG: divide the P/E number by the growth percent (for example, 20 ÷ 10% = 2.0).

Best practices: document whether your P/E is forward or trailing, and match the growth timeframe to that P/E. One-liner: match timeframe, then divide.

Quick math example

Example you can plug into a spreadsheet: company price gives a forward P/E of 20. Consensus EPS growth for the next three years is 10%. So PEG = 20 ÷ 10% = 2.0.

Here's the quick math for Excel/Sheets: if A1 holds P/E and A2 holds growth as percent, use =A1/A2. If A2 is 10, result is 2.0. If A2 is 0, flag it - PEG is undefined.

Actionable check: when PEG > 2.0, run DCF and EV/EBITDA checks before assuming premium valuation. One-liner: compute PEG, then stress-test the high-PEG names.

Note on percent versus decimal convention

Some analysts enter growth as a decimal (0.10) instead of percent (10). If you divide P/E by decimal, you get a different scale (20 ÷ 0.10 = 200), which is meaningless unless you consistently use that convention - so pick one and stick to it.

Practical rules:

• Use percent (10) for readability and to match most sell-side reports.
• If you use decimal, convert or label clearly to avoid mistakes.
• Always state the timeframe (eg, 3-year consensus to fiscal 2025) next to the PEG value so others can reproduce it.

What this hides: a low PEG can be driven by temporary EPS boosts or forecast errors, so always check analyst dispersion and accounting one-offs. One-liner: pick a convention, label it, and check the underlying EPS drivers - defintely document your source.

Choosing the growth input

Prefer forward consensus EPS growth over trailing growth

You're picking the growth rate that will feed the PEG, so use future-looking estimates not backward EPS performance.

Why: forward consensus reflects expected operating conditions, product cycles, and management plans over the next 3-5 years, while trailing growth lags reality and can be distorted by past one-offs.

Practical steps:

• Target the 3‑year or 5‑year earnings-per-share (EPS) CAGR for most valuations.
• If you need a quick screen, use the next‑12‑month (NTM) EPS growth with a forward P/E.
• Prefer median consensus over mean to reduce outlier bias.

One-liner: use forward consensus growth that matches your valuation horizon - not history.

Here's the quick math example: forward P/E = 18, expected EPS CAGR = 12% → PEG = 18 ÷ 12 = 1.5. What this hides: temporary cost cuts or buybacks can lift EPS short-term and understate real organic growth.

Sources: sell-side estimates, company guidance, and consensus aggregators

Use three, corroborating inputs so you can see bias and dispersion.

Where to pull numbers:

• Company guidance from the latest 10‑K, 10‑Q, or earnings call.
• Sell-side analyst estimates (Bloomberg, FactSet, Refinitiv).
• Consensus aggregators (Zacks, Refinitiv I/B/E/S, StreetAccount) and large broker reports.

Practical checks and thresholds:

• Require at least 5 independent estimates; fewer and treat the consensus as high‑uncertainty.
• Flag dispersion > 20% (std dev relative to mean) as noisy - dig into drivers.
• Adjust for buybacks: if share count is falling, split EPS growth into organic vs. buyback-driven portions.

One-liner: triangulate company guidance, sell-side medians, and aggregator consensus - then check how many analysts and how wide the spread is.

Here's the quick math: align timeframes for P/E and growth to stay consistent

Mismatch kills meaning: a forward P/E (next 12 months) needs NTM growth; a 3‑year PEG needs a 3‑year CAGR.

Concrete examples:

• Forward case - forward P/E = 16, NTM EPS growth = 8% → PEG = 16 ÷ 8 = 2.0.
• Multi-year case - current price / FY+1 EPS = implied P/E of 20, expected 3‑year EPS CAGR = 10% → 3‑year PEG = 20 ÷ 10 = 2.0.

Steps to implement:

• Pick your P/E convention first (trailing, forward NTM, or FY+1) and stick with it.
• Use the matching growth metric (YoY for NTM, CAGR for multi‑year).
• Run sensitivity: re-calc PEG with ±2-3 percentage points in growth to see fragility.

One-liner: same timeframe or it's apples-to-oranges - always align P/E and growth before you compare PEGs.

Action: run a 3‑year forward PEG for your top 20 names using median sell-side CAGR, flag names with fewer than 5 estimates; Owner: you or your equity analyst to deliver by Friday.

Interpreting PEG and common benchmarks

You want a quick, reliable rule to tell if a stock's growth justifies its price-PEG helps, but only when you use it with sector context and a short checklist of sanity checks.

Rule of thumb: PEG ≈ 1 is fair value; <1 may be undervalued; >1 may be expensive

Takeaway: Treat PEG ≈ 1 as a starting benchmark - below that flags a candidate to review, above that flags a premium you must justify.

Here's the quick math so it's concrete: P/E = 20, expected EPS growth = 10% → PEG = 2.0. P/E = 15, expected growth = 15% → PEG = 1.0.

Steps to use the rule of thumb:

• Compute forward P/E and forward growth same timeframe
• Compare to PEG 1 as a first filter
• If PEG <1, run deeper due diligence
• If PEG >1, require clear growth visibility

Best practices:

• Use 3-5 year consensus growth
• Prefer forward P/E over trailing P/E
• Adjust for one-offs before calculating EPS

One-liner: PEG gives a fast price-for-growth yardstick you must verify with fundamentals.

Sector norms matter: high-growth tech PEGs run higher than utilities

Takeaway: Don't compare a software firm to a power utility; sector context changes whether a PEG of 1.5 is cheap or rich.

Practical steps to apply sector context:

• Pull the sector median PEG from your screener
• Compare the stock to direct peers, not the whole market
• Use the same growth horizon for peer PEGs
• Adjust your benchmark if the company is early-stage or cyclical

Specific checks:

• If tech: expect higher PEGs due to reinvestment
• If consumer staples or utilities: expect lower PEGs
• When in doubt, use a peer quartile (top 25%) comparison

One-liner: Benchmark to peers in the same business and lifecycle, not the market at large.

Watch that a low PEG can hide weak fundamentals or unsustainable growth

Takeaway: A low PEG is a warning light, not a buy signal-check quality of earnings, buybacks, and cyclicality.

Red flags to chase down:

• Negative or highly volatile free cash flow
• EPS lift driven mainly by buybacks
• One-time gains or accounting adjustments
• Analyst cuts to future growth estimates
• Cyclical peak in margins or revenue

Quick validation steps:

• Normalize EPS (remove one-offs, adjust for buybacks)
• Recompute PEG using conservative growth (subtract 2-3 percentage points)
• Run a simple DCF as a sanity check
• Check consensus revisions over the last 6-12 months

What this estimate hides: PEG ignores balance sheet risk, leverage, and capital intensity-so low PEGs can be value traps if those are poor.

One-liner: Low PEGs deserve healthy skepticism-stress-test the growth and the quality of earnings first.

Limitations and pitfalls

Negative earnings or negative growth make PEG meaningless

When a company reports negative EPS (losses) or analysts forecast negative growth, PEG breaks down because the P/E denominator or the growth rate is non-positive, so the ratio stops conveying price versus future earnings expansion.

Here's the quick math: price per share divided by EPS gives P/E; if EPS = -2.00 the P/E is negative and PEG is not interpretable. One-liner: PEG needs positive EPS and positive growth.

Practical steps and checks

• Confirm forward EPS > 0 and expected growth > 0 before using PEG.
• If EPS is negative, switch to valuation metrics that work with losses: EV/Revenue, EV/EBITDA (if EBITDA positive), or a DCF (discounted cash flow) model based on projected cash flows.
• When growth flips from negative to positive in guidance, recompute PEG using the same forecast horizon for both P/E and growth.
• Flag firms with volatile EPS (quarter-to-quarter swings) and prefer a 3-year forward median growth estimate to avoid one-off swings.

What this hides: companies in early turnarounds or cyclical troughs can have misleading PEGs if you ignore timing-so treat PEG as a conditional filter, not a definitive score. Also, defintely check the sign of both inputs before trusting the number.

Analyst estimates can be biased and move PEG quickly

PEG depends on expected EPS growth, which typically comes from sell-side analysts or consensus services; those estimates carry behavioral and informational bias and can change sharply with upgrades or downgrades, creating noisy PEG swings.

One-liner: PEG can be a tale of market sentiment as much as fundamentals.

Practical steps to reduce bias

• Use consensus medians from multiple aggregators (e.g., IBES, Refinitiv) rather than a single house view.
• Inspect the number of analysts covering the stock-fewer than 5 analysts increases dispersion risk.
• Trim extreme high/low forecasts and use the middle 50% (interquartile) consensus for a robust growth input.
• Track recent revision trends: rising revisions usually lead to lower P/E and better PEG; falling revisions do the opposite-quantify revision momentum over the last 3 months.
• Build scenario PEGs: base, downside (-2 to -3 percentage points growth), upside (+2 to +3 points) to see sensitivity.

Quick example: if P/E is 20 and consensus growth is 10%, PEG = 2.0; if growth falls to 7%, PEG jumps to 2.86. What this estimate hides: short-term estimate moves can mask long-term franchise value, so combine PEG with fundamental checks.

Accounting one-offs, buybacks, and cyclicality distort EPS and PEG

Reported EPS often includes non-recurring items (restructuring charges, asset sales), share-count changes from buybacks, and cyclical profits tied to commodity or macro cycles-each can inflate or deflate EPS and thus PEG without changing underlying cash generation.

One-liner: Adjust EPS before you compute PEG.

Practical normalization steps

• Compute adjusted EPS: remove material one-offs and report both GAAP and adjusted figures; use adjusted EPS for growth inputs when appropriate.
• Normalize for buybacks: if shares outstanding fall, calculate EPS growth both with and without buyback-driven share reduction. Example: net income $100m, shares 100m → EPS = $1.00; buyback 5m shares → EPS → $1.0526 (a 5.26% lift) that is not organic earnings growth.
• Average EPS across a cycle for cyclical businesses (use rolling 3-year or 5-year averages) to avoid peak/trough distortions.
• Cross-check with cash metrics: prefer free cash flow per share or operating cash flow growth where accounting noise is high.
• Document adjustments and show both adjusted and unadjusted PEGs so stakeholders see the impact.

What this approach hides: normalization relies on judgment-make adjustments explicit, quantify their effect, and stress-test valuations under different normalization rules.

Practical ways to use the PEG ratio

Screen for low PEGs to prioritize research

You're filtering a watchlist and need a fast way to flag names that may be mispriced for growth; start with a PEG screen.

One-liner: Use PEG as a first-pass filter to surface candidates for deeper due diligence.

Steps to run the screen:

• Set the screen to use forward P/E and consensus EPS growth for the same timeframe (commonly next 3 years starting FY2025).
• Flag stocks with PEG below 1.0 but require positive EPS growth and positive trailing earnings-PEG on negative earnings is meaningless.
• Require at least 3 analyst estimates or a listed company guidance to avoid thin-coverage noise.
• Filter out microcaps with unstable earnings by adding a minimum market cap (example: > $300m), or use liquidity thresholds.

Best practices:

• Compare to the sector median PEG, not the whole market-tech and biotech carry higher norm than utilities.
• Always pair the PEG filter with quick quality screens: debt/EBITDA, return on invested capital (ROIC), and recent revenue trend.
• If a name has PEG < 1 but weak margins or shrinking revenue, defintely deprioritize until you resolve the fundamental issue.

Combine PEG with DCF and EV/EBITDA checks

You want to avoid being misled by a single metric; combine valuation approaches so your view rests on multiple pillars.

One-liner: Use PEG to shortlist, DCF to estimate intrinsic value, and EV/EBITDA to sanity-check relative value.

Practical workflow:

• Run a quick DCF using consensus FY2025-FY2027 cashflow growth, a terminal growth of 2-3%, and a risk-adjusted WACC range (example: 7-10%) to get a valuation band.
• Calculate EV/EBITDA and compare to the sector median; a low PEG with a high EV/EBITDA is a red flag-something else is masking value.
• Reconcile differences: if DCF implies 25% upside but EV/EBITDA shows no edge, revisit assumptions-revenue durability, margins, and capex intensity.

Decision rules:

• Accept a shortlist candidate only if at least two methods suggest attractiveness (e.g., PEG < 1 and DCF shows >= 15% upside under base-case assumptions).
• Document the key levers that drive DCF value-growth years, margin expansion, terminal multiple-and stress them in sensitivity checks.

Stress-test PEG across plausible growth scenarios

You need to know how fragile the PEG signal is to small changes in growth estimates; run simple sensitivity tests.

One-liner: Recalculate PEG after shifting growth by ±2-3 percentage points to see whether the story holds.

How to run the stress test (step-by-step):

• Pick the base inputs: current forward P/E and consensus 3-year EPS CAGR starting FY2025.
• Calculate PEG = P/E ÷ growth% for base case, then recalc for growth minus 2% and plus 2% (repeat at ±3% for higher uncertainty names).
• Record the PEGs and note scenarios where PEG crosses key thresholds (for example, moves from 1.0 to > 1.5).

Quick math example:

• P/E = 25, consensus growth = 20% → PEG = 1.25.
• Growth -2ppt → 18% → PEG = 1.39; growth +2ppt → 22% → PEG = 1.14.

What to watch and act on:

• If a small downgrade (‑2 to ‑3ppt) pushes PEG well above sector norms, classify the name as high sensitivity and require stronger evidence for durable growth.
• Complement the stress test with scenario DCFs-run base, downside, and upside cases and tie each to a PEG outcome.

Next step: You (or your equity analyst) should run a 3-year forward PEG screen using FY2025 consensus growth for your top 20 names and produce the sensitivity table by Friday.

PEG ratio final actions

PEG as a quick, useful screen

You need a fast, repeatable test to narrow your universe before deep work; PEG fills that role.

One-liner: PEG ≈ 1 signals fair value; below that flags candidates for deeper due diligence.

Steps and best practices:

• Use the same timeframe for inputs: price divided by fiscal‑year 2025 EPS for P/E, and the consensus 3‑year EPS growth rate (next three fiscal years) for growth.
• Filter out names with negative FY2025 EPS or negative 3‑year growth up front - PEG is meaningless there.
• Flag stocks with PEG < 1 and separate those with quality issues (weak margins, falling revenue, or one‑off gains).
• Note sector norms: expect higher PEGs for software and biotech, lower for utilities and staples.

What to watch: a low PEG can hide cyclical earnings or accounting one‑offs - always cross‑check cash flow and margins.

Compute and rank three‑year forward PEGs

You're asking for a ranked list of your top names; make the math explicit so anyone can reproduce it.

One-liner: compute PEG as P/E ÷ growth percent using FY2025 P/E and the consensus 3‑year EPS CAGR.

Concrete steps:

• Collect data as of market close on a set date (use close of business 2025‑11‑28 or pick your own consistent date).
• Get FY2025 diluted EPS from company filings or consensus; record market price and compute P/E = price ÷ FY2025 EPS.
• Pull sell‑side consensus 3‑year EPS CAGR (next three fiscal years). Prefer median of >=5 analysts.
• Calculate PEG = P/E ÷ growth% (example: P/E 20 and growth 10% → PEG = 2.0).
• Rank tickers by PEG ascending; add flags for negative earnings, recent analyst revision > ±50 bps, and buyback activity > 5% of market cap.
• Stress-test sensitivity: recalc PEG with growth ± 2 and ± 3 percentage points and keep the variance column.

Quick math note: use growth in percent (not decimal) so spreadsheets match common practice; what this hides: not adjusting for margin expansion or buybacks.

Assign owner and deadline

You want action and accountability - assign a clear owner and a date so this doesn't become a vague task.

One-liner: run the screen, validate the top 20, and report back with ranked outputs and caveats.

Practical assignment and deliverables:

• Owner: You or your equity analyst to run the screen.
• Deliverable: spreadsheet with columns - Ticker, Company Name, Price Date, Price, FY2025 EPS, P/E, 3‑yr EPS CAGR (%), PEG, PEG +/-2pp, Flags (negative EPS, one‑offs, buybacks, recent revisions).
• Quality checks: corroborate FY2025 EPS with the 10‑K/10‑Q and use at least two consensus aggregators (eg, IBES, Bloomberg) where available.
• Deadline: report out by Friday, 2025‑12‑05 with the top 20 ranked and one‑page note on the top five low‑PEG names.

Next step: You or your analyst - run the screen and share the spreadsheet by the deadline; follow up with a 30‑minute review to decide which names get DCF or EV/EBITDA follow ups. (defintely keep the stress tests.)