PEG Ratio: What It Is and How to Use It for Smarter Stock Picks

When you’re evaluating a stock, the PEG ratio, a valuation metric that adjusts the price-to-earnings ratio by factoring in expected earnings growth. Also known as the price/earnings-to-growth ratio, it helps you see if a stock’s price is justified by how fast the company is growing. A high P/E might look expensive—but if earnings are zooming up, the PEG ratio could tell you it’s still a bargain. This isn’t just theory. Investors who ignore growth and only look at P/E often buy overpriced stocks. The PEG ratio fixes that blind spot.

The price-to-earnings ratio, the classic measure of how much you pay for each dollar of a company’s earnings is useful, but it’s static. It doesn’t care if a company’s profits are rising 5% a year or 25%. That’s where the earnings growth, the annual rate at which a company’s net income is increasing comes in. The PEG ratio divides the P/E by the earnings growth rate. So a stock with a P/E of 20 and 20% growth has a PEG of 1.0—that’s often seen as fairly valued. Below 1? Could be undervalued. Above 1.5? Might be overhyped. This isn’t magic, but it’s a lot closer to reality than P/E alone. You’ll find this metric most useful with companies that have clear, consistent growth—think tech startups or healthcare innovators—not utility stocks with flat earnings.

Here’s the catch: PEG only works if the growth number is realistic. If a company’s projected growth is based on a one-time product launch or a temporary market boom, the PEG ratio will lie. That’s why smart investors cross-check it with other data—like revenue trends, profit margins, and industry outlooks. It’s also less helpful for mature companies with low or no growth. But for growth-oriented investors, it’s one of the simplest tools to separate hype from value. You’ll see it used often in posts about PEG ratio analysis, dividend stocks with growth, and how to avoid overpaying for hot stocks.

The posts below give you real examples: how to calculate it yourself, which brokers show it automatically, how it stacks up against other metrics like free cash flow yield, and why some top investors swear by it while others ignore it entirely. Whether you’re just starting out or looking to refine your stock-picking process, you’ll find practical, no-fluff insights here—no jargon, no theory without application.