What is the PEG Ratio? Definition, Formula, and Example
The PEG ratio divides a stock's price-to-earnings ratio by its earnings growth rate to show whether a high P/E is justified by growth or is simply expensive.
What Is the PEG Ratio?
The price/earnings-to-growth ratio (PEG ratio) takes the P/E ratio and divides it by the company's expected earnings growth rate. It exists to answer a question the P/E ratio can't answer on its own: is this stock expensive because the market is overpaying, or expensive because earnings are growing fast enough to justify the multiple? A stock with a P/E of 40 looks pricey in isolation. If earnings are compounding at 40% a year, the PEG ratio is 1.0 — fairly priced by the standard Peter Lynch popularized in *One Up on Wall Street*. A PEG below 1.0 signals the stock is cheap relative to its growth; above 1.0 signals the market is paying a premium for that growth (or pricing in a slowdown risk).
PEG Ratio Formula
PEG = P/E Ratio ÷ Annual EPS Growth Rate
The growth rate is entered as a whole number, not a decimal — 25% growth is "25," not "0.25." Two variants exist:
- Trailing PEG: trailing twelve-month P/E divided by trailing (historical) EPS growth.
- Forward PEG: forward P/E (using next-twelve-months consensus EPS) divided by projected forward growth, usually a 3-5 year consensus estimate or next-year analyst estimate.
Forward PEG is more common on trading terminals because it's forward-looking, but it inherits all the estimate risk baked into analyst models.
Worked Example: Nvidia's PEG Ratio
NVDA traded at a trailing P/E of roughly 31.1 in July 2026, with trailing-twelve-month EPS growth of approximately 108.9% following fiscal 2025 revenue of $130.5 billion (up 114% year over year) and GAAP EPS growth of 147%.
PEG = 31.1 ÷ 108.9 ≈ 0.29
A PEG under 0.5 is unusually cheap for a mega-cap — the market is pricing NVDA's earnings growth at less than a third of the multiple that growth alone would justify under the Lynch 1.0 heuristic. Compare that to a slow-grower like a consumer staple trading at a P/E of 22 with 4% EPS growth: PEG = 22 ÷ 4 = 5.5, a stock that looks cheap on P/E alone but expensive once growth is priced in.
When Traders Use the PEG Ratio
PEG is a screening tool for separating "expensive but growing into it" from "expensive and priced for perfection." Growth-stock investors use it to avoid overpaying for momentum names — a stock can have a scary-looking P/E and still screen cheap on PEG if consensus growth is high enough. It's also used for sector-relative comparisons: semiconductor names with 30-40x P/E ratios are routinely compared on PEG rather than raw multiple, since the sector's growth rates run far above the market average.
Limitations of the PEG Ratio
PEG is only as good as the growth estimate feeding it — a consensus estimate revision (or a beat/miss that changes forward guidance) moves the denominator and can flip a "cheap" PEG to an "expensive" one overnight. The ratio breaks down entirely for companies with negative earnings (P/E is undefined) or negative growth (PEG turns negative and becomes meaningless as a comparison metric). It also ignores capital intensity, balance-sheet risk, and margin durability — two companies with identical PEG ratios can carry very different levels of execution risk if one is growing off debt-funded capex and the other is self-funding through free cash flow. PEG says nothing about whether the growth rate itself is sustainable for another five years or is a one-time comp effect.