PEG Ratio Calculator
Written by Thierno Sadou Diallo, formula verified per our methodology • Last checked on 9/10/2026
The PEG ratio is calculated with P/E ÷ expected annual earnings growth rate (in percentage points). For a P/E of 20 and 10% growth, the PEG is 2.
Explanation
The PEG ratio (Price/Earnings to Growth), popularized by investor Peter Lynch in his book "One Up on Wall Street" (1989), builds on the price-to-earnings ratio (P/E) — a valuation lens complementary to income-based metrics like the dividend yield — by factoring in a company's expected earnings growth: two companies can show exactly the same P/E while having very different growth prospects, which makes comparing them by P/E alone misleading. By dividing the P/E by the expected annual earnings growth rate (expressed in percentage points, for example 10 for 10% growth, not 0.10), the PEG puts valuation back into the context of the company's momentum: a stock with a high P/E can turn out relatively cheap if its growth is very fast, while a stock with a modest P/E can conversely be expensive if its growth is close to zero. The commonly cited rule of thumb holds that a PEG near 1 signals a valuation roughly balanced against growth, that a PEG below 1 signals a stock potentially undervalued given its prospects, and that a PEG above 2 signals possible overvaluation — widely circulated benchmarks in financial literature, not universal thresholds guaranteeing an outcome. The PEG remains, by nature, sensitive to how reliable the growth estimate used is, usually an average of analyst forecasts over 3 to 5 years, itself subject to revision.
Example: a P/E of 20, 10% expected growth
Inputs
Share price: €150. Earnings per share: €7.5. Expected earnings growth: 10%.
Calculation
P/E = 150 ÷ 7.5 = 20. PEG = 20 ÷ 10 = 2.
Result
This stock shows a PEG of 2, above the commonly cited benchmark of 1 for a balanced valuation.
Frequently asked questions
Where does the PEG-equals-1 benchmark come from?
This benchmark was popularized by American investor Peter Lynch, who considered that a stock whose P/E roughly equals its expected earnings growth rate (PEG≈1) offers a reasonable valuation given its prospects. It's a widely circulated rule of thumb, not a universal mathematical proof: it nonetheless remains a useful benchmark for quickly comparing several stocks against each other.
Why is the growth rate expressed in percentage points rather than as a decimal?
This is the PEG ratio's standard convention, inherited directly from Peter Lynch's method: dividing the P/E by 10 (for 10% growth) rather than by 0.10 gives PEG values in an intuitive range (generally between 0.5 and 3), whereas dividing by 0.10 would give values ten times larger, with no real change in interpretation but a loss of the ratio's conventional readability.
Is the PEG reliable for every company?
The PEG is mostly relevant for companies whose earnings growth is relatively stable and predictable; it becomes less reliable for cyclical companies (whose earnings swing widely with the economic cycle) or for those with no positive earnings, where the P/E itself can't be calculated. In that last case, a ratio like price-to-sales remains usable where the PEG no longer is.