Price/Earnings to Growth (PEG Ratio)

The PEG ratio is calculated by dividing the P/E ratio by the growth rate in the company’s EPS. The growth rate may be annual or a compounded average over a few years. A stock with a P/E of 20 and a growth rate of 20% would have a PEG of 1.

PEG is widely viewed as a better alternative to the P/E ratio as it factors in growth as well. However, the PEG ratio is not a very precise mathematical formula, as the growth rate is essentially a percentage. Nevertheless it is a very good complement to the P/E ratio and could be useful to investors in growth stocks.