PEG Ratio Calculator

The Price/Earnings-to-Growth (PEG) ratio expands upon the traditional Price-to-Earnings (P/E) ratio by factoring in the company's projected annual earnings growth. First, the P/E ratio is found by dividing the stock price per share by its earnings per share (EPS). Next, earnings growth is typically calculated as the product of the firm's retention rate and its return on equity (ROE). Finally, the PEG ratio divides the P/E ratio by the percentage growth rate: PEG = (Price / EPS) / (Growth Rate x 100). A PEG ratio below 1.0 often indicates that a stock may be undervalued relative to its growth.

Imagine you are analyzing a technology company trading at a price of $50.00 per share with an earnings per share (EPS) of $2.50. First, calculate the P/E ratio by dividing $50.00 by $2.50, which gives 20. Next, suppose the company maintains a retention rate of 60% (0.60) and achieves a return on equity (ROE) of 20% (0.20), yielding an annual earnings growth rate of 12% (0.60 x 0.20 = 0.12 or 12%). Finally, divide the P/E ratio of 20 by the growth rate percentage (12), resulting in a PEG ratio of approximately 1.67. This suggests the stock trades at a premium relative to its immediate growth trajectory.

Always verify whether the earnings growth rate used in your calculation is based on historical performance or reliable future analyst estimates, as forward-looking projections drive market sentiment. Additionally, remember that cyclical industries can distort ROE and retention rates, making PEG ratios less reliable for commodities or heavy manufacturing sectors. Finally, always compare the PEG ratios of companies within the exact same industry rather than across disparate market sectors.