PEG Ratio
Fundamental Analysis
What it means
Price/Earnings-to-Growth Ratio: the P/E ratio divided by the company's annual EPS growth rate. It adjusts the P/E ratio for growth, so you can compare companies with different growth rates fairly.
Example
A company with a P/E of 30 and annual EPS growth rate of 15% has a PEG ratio of 2 (30 divided by 15). A PEG ratio below 1 is often considered undervalued, as you are paying less for each unit of growth.
Mistake beginners make
Beginners rely on PEG ratio without checking if the growth rate is sustainable. A one-time earnings boost can make the PEG ratio look temporarily low — always use a multi-year average growth rate, not just a single year's numbers.