PEG ratio

A ratio compares the price the market puts on a stock to something the company actually produces, its earnings, its assets, or its cash flow. It tells you how expensive a stock is relative to that measure, not just whether the share price is high or low in absolute terms.

The PEG ratio adjusts the price to earnings ratio for the company's expected growth rate. A high P/E can look expensive in isolation, but if the company is growing earnings quickly, that higher price may be entirely justified. The PEG ratio attempts to capture that by dividing P/E by the annual earnings growth rate.

The formula is: P/E ratio / Earnings growth rate (as a percentage, without the percent sign).

A PEG ratio near 1 is often read as fairly priced relative to growth. Below 1 can suggest a stock is cheap relative to its growth, above 1 can suggest it is expensive relative to its growth. The ratio depends heavily on the growth estimate used, which is a forecast, not a reported fact, so it is far less reliable than ratios built only from historical numbers.