Definition:
The PEG Ratio (Price/Earnings to Growth Ratio) is a valuation metric that compares a company's Price-to-Earnings (P/E) ratio with its expected earnings growth rate. It helps investors determine whether a stock is fairly valued by considering not just its current earnings, but also how fast those earnings are expected to grow.
Formula
PEG Ratio = P/E Ratio ÷ Annual EPS Growth Rate (%)
Example
P/E Ratio = 24
Expected EPS Growth = 12%
PEG Ratio = 24 ÷ 12 = 2
This means investors are paying 2 units of valuation for every 1% of expected earnings growth.
Difference between PEG Ratio and P/E Ratio
The P/E ratio tells you how expensive a stock is today, but it doesn't tell you whether that price is justified by future growth. The PEG ratio fills this gap by factoring in a company's expected earnings growth.
It helps investors:
Judge whether a high P/E is supported by strong future growth.
Identify potentially undervalued growth stocks.
Compare companies with different growth rates more fairly.
Avoid overpaying for stocks with slow earnings growth.
Industry | Typical P/E Range | Typical PEG Range | Why the Difference? |
Information Technology | 20–40 | 1–2 | High expected earnings growth justifies higher P/E multiples. |
Banking & Financial Services | 10–20 | 0.8–1.8 | Moderate, steady growth with regulated operations keeps valuations lower. |
Pharmaceuticals | 20–35 | 1–2 | Innovation and new drug pipelines support premium valuations despite risks. |
FMCG | 35–60 | 2–3 | Stable earnings, strong brands, and predictable cash flows often lead to high P/E despite slower growth. |
Automobile | 15–30 | 0.8–1.5 | Cyclical demand and economic sensitivity result in moderate valuations. |
Capital Goods | 20–35 | 1–2 | Growth depends on infrastructure spending and economic cycles. |
Chemicals | 20–35 | 1–2 | Valuations vary with export demand, commodity prices, and specialty product mix. |
Real Estate | 15–30 | 0.8–1.5 | Earnings fluctuate with interest rates, project cycles, and property demand. |
Utilities | 15–25 | 1.5–3 | Slow earnings growth but highly stable and predictable cash flows often result in higher PEG ratios. |
Definition:
The PEG Ratio (Price/Earnings to Growth Ratio) is a valuation metric that compares a company's Price-to-Earnings (P/E) ratio with its expected earnings growth rate. It helps investors determine whether a stock is fairly valued by considering not just its current earnings, but also how fast those earnings are expected to grow.
Formula
PEG Ratio = P/E Ratio ÷ Annual EPS Growth Rate (%)
Example
P/E Ratio = 24
Expected EPS Growth = 12%
PEG Ratio = 24 ÷ 12 = 2
This means investors are paying 2 units of valuation for every 1% of expected earnings growth.
Difference between PEG Ratio and P/E Ratio
The P/E ratio tells you how expensive a stock is today, but it doesn't tell you whether that price is justified by future growth. The PEG ratio fills this gap by factoring in a company's expected earnings growth.
It helps investors:
Judge whether a high P/E is supported by strong future growth.
Identify potentially undervalued growth stocks.
Compare companies with different growth rates more fairly.
Avoid overpaying for stocks with slow earnings growth.
Industry | Typical P/E Range | Typical PEG Range | Why the Difference? |
Information Technology | 20–40 | 1–2 | High expected earnings growth justifies higher P/E multiples. |
Banking & Financial Services | 10–20 | 0.8–1.8 | Moderate, steady growth with regulated operations keeps valuations lower. |
Pharmaceuticals | 20–35 | 1–2 | Innovation and new drug pipelines support premium valuations despite risks. |
FMCG | 35–60 | 2–3 | Stable earnings, strong brands, and predictable cash flows often lead to high P/E despite slower growth. |
Automobile | 15–30 | 0.8–1.5 | Cyclical demand and economic sensitivity result in moderate valuations. |
Capital Goods | 20–35 | 1–2 | Growth depends on infrastructure spending and economic cycles. |
Chemicals | 20–35 | 1–2 | Valuations vary with export demand, commodity prices, and specialty product mix. |
Real Estate | 15–30 | 0.8–1.5 | Earnings fluctuate with interest rates, project cycles, and property demand. |
Utilities | 15–25 | 1.5–3 | Slow earnings growth but highly stable and predictable cash flows often result in higher PEG ratios. |