PEG ratio
Price/Earnings to Growth Ratio
The PEG ratio adjusts the PE ratio for profit growth. It asks whether the multiple you are paying is justified by how fast earnings are growing.
Formula
PEG
PEG = PE ÷ Profit Growth Rate (%)
Benchmark: Around or below 1 is fair, above 1 signals expensive
Reading the number
The rule of thumb: PE should not exceed the profit growth rate. Use the three year or five year average growth in the denominator, not a single year.
When the three year and five year answers disagree, look at the latest one year growth to decide which window deserves more weight. If growth is accelerating and last year was strong, weight the three year figure, because it reflects the recent trend. If last year's growth matches the five year average, weight the five year figure, because the long-term rate is being maintained.
Use PEG only for companies with stable, consistently growing earnings: FMCG, some pharma, some IT. It breaks on cyclical or erratic earners.
Indian example
Related ratios
Glossary terms
From the research
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