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

**Table of Contents**show ▼

## 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.