The formula
PEG = P/E ÷ annual EPS growth rate (as a number, so 25% is written 25). We use EPS growth, not total profit growth, because P/E itself is built on EPS; if the company issues more shares, total profit can rise while EPS does not rise by the same rate. The idea: a high P/E can make sense if EPS grows fast, and a low P/E may not be cheap if EPS stands still. The version here pairs a forward P/E (on the expected profit for next year) with expected growth. If you use a trailing P/E on the last reported profit, pair it with historical growth. The point is that both sides match.
A two-company example
Company A has a P/E of 20 with EPS expected to grow 25% a year, so PEG = 0.8. Company B has a P/E of only 8, but expected EPS growth of 2%, so PEG = 4. Relative to its growth, B is valued at a much higher multiple than A.
Many books describe a PEG near 1 as balanced. Treat that as a starting point for questions, not as a dividing line.
The weakest part of the formula
In this version both parts are forecasts: the profit behind the forward P/E and the growth in the denominator. If the forecast is too optimistic, PEG looks better than reality. And one year's growth can be unusual, like a company whose EPS jumped only because the year before was very weak.
That is why it helps to try several growth assumptions and see how much PEG moves. If A grows 10% instead of 25%, its PEG becomes 20 ÷ 10 = 2.
Start from P/E
The stock screener shows P/E for many companies. Pick one, then go back to its financial statements to see how fast its EPS has actually grown over several years.
Check yourself
1. P/E 15, expected EPS growth 10%. What is PEG?
2. A company's EPS is shrinking year over year. Do you calculate PEG?
Summary
- PEG = P/E ÷ EPS growth rate.
- It shows a high P/E can make sense with fast growth, and the reverse.
- Growth is a forecast, so try several assumptions, and do not use it with negative growth.