Below is a PEG ratio calculator, or price to earnings/growth ratio calculator. Enter a company's current trading price, its 12 month earnings, and its earnings growth rate to compute its PEG ratio.
Price/Earnings to Growth Ratio Calculator
What is the Price to Earnings to Growth or PEG Ratio?
The price to earnings to growth ratio – more commonly the PEG ratio – compares the current price multiple you pay to acquire a company's equity versus the future growth of the company's earnings.
Recognizing that companies are valued on their future earnings, the PEG ratio is shorthand for a larger discounted cash flow (DCF) analysis accounting for future earnings growth. Unless discount rates are extremely high (for example, in high-interest rate, high-inflation environments), strong companies with more significant growth potential should be valued higher than companies with flatter earnings growth rates.
Mario Farina first developed the PEG ratio in A Beginner's Guide To Successful Investing In The Stock Market (affiliate link).
Peter Lynch was a major champion of the ratio and even gave us a benchmark to watch for - a PEG of 1, where a company's P/E ratio matches its growth rate (or is lower). He wrote about it first in One Up on Wall Street (affiliate link).
Strengths of Price Earnings to Growth
Unlike the PE ratio (price to earnings), the PEG ratio does account for some of a company's growth prospects. All else equal, a company growing quicker should have a higher PE ratio than a slow-grower. The PEG ratio helps normalize companies for earnings growth (or show undervalued stocks which wouldn't show up through other screens).
Limitations on the Price Earnings to Growth Ratio
Like all ratios, the PEG ratio suffers from the lack of nuance you'd find in a discounted cash flow model. With a proper DCF, you could account for rapid growth followed by leveling off or all manner of future risks to a business.
Price-based ratios (based on market capitalization), as opposed to enterprise value-based ratios, don't truly reflect the full price of a company. Since a company's equity stack may include preferred shares and debt (and the company may carry significant cash on its books), EV ratios better reflect the total size of a company.
Additionally, the PEG ratio doesn't include a major source of shareholder return: the dividend yield. The Peter Lynch championed PEGY ratio includes the dividend yield in its calculation.
And, of course, the future is unknown. While prospects for a company may be good, events such as recessions, wars, pandemics, natural disasters, and the like – not to mention the competition inherent in business – may mean companies don't grow as fast as predicted. Be careful when projecting future growth.
Price to Earnings/Growth Ratio Formula
The PEG ratio formula is:
PEG\ Ratio =\frac{\frac{price}{earnings}}{growth\ rate} Where:
- Price - the current trading price of a share of a company.
- Earnings - the last twelve months earnings per share.
- Growth Rate - the expected growth in earnings for the next 12 months.
