The PEG ratio is a company’s price-to-earnings ratio (PE) divided by its yearly growth in earnings per share (EPS). A PE of 30 with 15% growth gives a PEG of 2. A lower PEG means you pay less for each point of growth. On its own, it does not mean a stock is cheap.
How is PEG worked out?
PEG = PE ÷ yearly EPS growth (in %).
Say shares trade at ₹900 and the company earned ₹30 a share last year: a PE of 30. If EPS is expected to reach ₹34.50 next year, that is 15% growth, so the PEG is 30 ÷ 15 = 2.0.
Peter Lynch made the idea famous with the rule of thumb that a fairly priced company’s PE is about equal to its growth rate. That is why a PEG of 1 is a common reference point. It is a rule of thumb, not a law.
4 made-up rupee examples
| Company (made up) | PE | EPS growth | PEG |
|---|---|---|---|
| Consumer goods maker | 50 | 12% | 4.2 |
| Private lender | 15 | 18% | 0.8 |
| Metals producer | 6 | 2% | 3.0 |
| IT services firm | 25 | 10% | 2.5 |
- Consumer goods maker: next year’s growth alone does not explain a PE of 50. The market may be paying for a brand or a long runway, which PEG cannot see.
- Private lender: a PEG under 1 can mean the market doubts the growth will last, for example because of loan quality.
- Metals producer: the lowest PE but a high PEG. At the top of a cycle, earnings are high and further growth is small.
- IT services firm: compare it with other IT firms, not with a lender.
How should you read a PEG?
- Compare like with like: PEG works best within one industry.
- Check the growth used: trailing PEG uses past growth, forward PEG uses forecasts. Both can mislead.
- Mind the period: 1 year of growth is short for a company that may grow for 10. The implied growth guide takes the longer view.
When does PEG mislead?
- No growth or a loss: the PEG has no meaning.
- A low base: EPS rising from ₹2 to ₹6 is 200% growth and a tiny PEG that says little about later years.
- One-off items: an asset sale can inflate 1 year’s EPS.
- Balance sheets: PEG ignores debt, cash and return on capital. For lenders, book value and asset quality often matter more.
- Mixed periods: a calendar-year PE over fiscal-year growth gives a wrong PEG.
How does Chart in Motion compute PEG?
For a stock, the Financials panel shows PE, Next 12M P/E and Next 12M PEG. The PEG rolls forward one quarter at a time. “Current” EPS blends last fiscal year’s reported EPS with this year’s forecast, by how many quarters are done. The forecast blends this year’s and next year’s forecasts the same way.
A made-up example: last year’s EPS ₹40, this year’s forecast ₹46, next year’s ₹52.90. With 2 quarters done, current EPS is ₹43 and the forecast ₹49.45, so growth is 15%. At ₹1,075 the PE is 25 and the PEG 25 ÷ 15 = 1.7.
If any of those years shows a loss, or growth is zero or negative, the app shows no PEG. PEG can also be a watchlist column (12M PEG) you sort by.
For an index, the Indices panel (Index growth and valuation on a phone) shows 2 PEGs: trailing (TTM), using past growth, and forward (Fwd), using forecast growth. Under 1 shows in green and 2 or more in red; the colours mark the ends of the range, not a call to act.
See it in the app
PEG appears in the Financials panel for each stock and the Indices panel (Index growth and valuation on a phone) for each index. More on the features page.