Beginner's guide to investing: What does a PEG ratio tell you?

By Deputy editor Tim Bennett May 12, 2011

Tim Bennett

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Tim Bennett looks at an improvement on the standard price/earnings ratio - the PEG ratio - and explains what it is and how you calculate it.

And watch all of Tim's video tutorials here

• See also: Guide to price/earnings ratios and What is a dividend yield?

PEG ratio

The price/earnings to earnings growth, or PEG, ratio is used as a rule of thumb to consider basic value while taking earnings growth into account. You get it by dividing a stock's p/e by the annual growth rate of its earnings per share. The lower a PEG the better, as it means a stock is cheap relative to its potential earnings growth. Thus firm A, a flashy biotech, might have a p/e of 100, but a growth rate of 50%, giving it a PEG of two, while firm B, a solid support services group with a p/e of ten and a growth rate of 7% has a PEG of 1.4. On the face of it, firm A seems more exciting, but the PEG ratio shows that in risk and reward (price and growth) terms, it is the more expensive.

• Entry from MoneyWeek's Financial glossary.

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Published in Video tutorials | More articles by Tim Bennett

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  • 1. martin

    (21 March 2012, 12:20PM)  Complain about this comment

    So Tim what does a peg of 0 or 0.1 mean? Looking at mining stocks these are the pegs of rio tinto and bhp, it seems to imply fantastic earnings growth?

  • 2. Iain

    (01 June 2012, 10:18AM)  Complain about this comment

    Hi Tim,
    What does a negative PEG suggest!

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