PEG Ratio
P/E divided by growth. Helps check fair pricing.
Why it matters
A P/E ratio on its own cannot tell you whether a fast-growing company is expensive. A P/E of 40 sounds steep next to a P/E of 12, but if the first company is growing three times as fast, it may be the better value. The PEG ratio fixes this by putting the price in the context of growth, so you are no longer comparing prices in a vacuum.
That single adjustment lets you line up a slow, cheap stock against a fast, pricey one and judge them on the same footing: how much you are paying for each unit of growth. It is the natural next step once you are comfortable with the P/E.
An everyday way to picture it
Picture two saplings at a nursery. One costs ₹400 and the other ₹800. The cheaper one looks like the obvious buy, until you learn that the ₹800 sapling grows twice as fast and will be the taller, fruit-bearing tree within a few seasons. Paying more for the faster grower can be the smarter choice, as long as it grows quickly enough to justify the premium.
The PEG ratio does exactly this for stocks. It does not ask "what is the price" on its own, but "what is the price for the growth you are getting". A higher P/E is fair when the growth behind it is fast enough, and a lower P/E can be poor value when growth is barely moving.
What the number is really telling you
PEG takes the P/E ratio and divides it by the company's annual earnings growth rate, written as a plain number of percent. A company on a P/E of 20 that is growing 20 percent a year has a PEG of 1.
The same growth rate can make a high P/E look reasonable and a low P/E look poor. Watch what happens when you hold three companies side by side.
| Company | P/E | Growth | PEG | What it tells you |
|---|---|---|---|---|
| A slow, "cheap" grower | 15 | 6 percent | 15 ÷ 6 = 2.5 | Looks cheap on its P/E, but expensive once you weigh its crawling growth. |
| A fast, "pricey" grower | 30 | 30 percent | 30 ÷ 30 = 1.0 | A high P/E, yet fairly priced because the growth keeps pace with it. |
| A bargain grower | 18 | 20 percent | 18 ÷ 20 = 0.9 | Cheap for how fast it grows, the kind of mismatch PEG is built to spot. |
- The bands are a starting point, not a verdict. A PEG near 1 is the rough mark for a stock fairly priced for its growth, below 1 is often read as cheap for the growth on offer, and well above 1 as expensive. Use them to ask better questions, not to skip the thinking.
- It leans on a growth estimate. The denominator is a forecast, and forecasts are often wrong. If the growth does not arrive, a comfortable-looking PEG was an illusion. It also breaks down at the bottom: for a low-growth or no-growth company the denominator shrinks toward zero, so the PEG balloons or stops making sense. You will see it shown as N/A when growth is zero.
See it for yourself
Set Sunrise's price, EPS, and expected growth, and watch the P/E and the PEG it produces. Drag growth down toward zero to see why PEG breaks for a company that is barely growing.
Worked example: Sunrise Foods
Sunrise Foods makes packaged snacks and staples sold across India. It is a steady, profitable consumer brand, the kind of business a beginner can reason about without specialist knowledge.
Sunrise trades at ₹500 on EPS of ₹20, so its P/E is 25. Profit is rising about 12 percent a year. Dividing one by the other turns that P/E into a PEG.
| Step | Working | Result |
|---|---|---|
| P/E ratio | Share price ₹500 ÷ EPS ₹20 | 25 |
| Annual earnings growth | Roughly how fast profit is rising | 12 percent |
| PEG | 25 ÷ 12 | about 2.1 |
A PEG of about 2.1 looks expensive even for a steady grower. Now hold Sunrise next to a rival on a P/E of 18 that is growing 20 percent a year. That rival's PEG is 18 divided by 20, or 0.9, so it is both cheaper and growing faster.
| Company | P/E | Growth | PEG | Reading |
|---|---|---|---|---|
| Sunrise Foods | 25 | 12 percent | about 2.1 | Expensive even for its steady growth |
| A faster rival | 18 | 20 percent | 0.9 | Cheaper, and growing faster |
Knowing Sunrise carries a PEG above 2, would you buy it now, or wait?
Remember this
In short: the PEG ratio puts a P/E in the context of growth, turning "is this expensive" into "is this expensive for what it grows". A PEG near 1 is the rough fair-value mark, but it is only as trustworthy as the growth estimate behind it, and it stops working for a company that barely grows.