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Updated 1mo ago.
Updated 1mo ago.
PEG ratio = P/E ÷ earnings growth rate (in %). Lets you compare companies with different growth profiles — a PEG of 1 is often "fair": P/E exactly reflects expected growth. PEG below 1 suggests undervaluation relative to growth; above 2, expensive. Sensitive to growth estimates, which can be optimistic.
A stock has a P/E of 30, which looks expensive. But its profits grow 30% a year. Its PEG is 1 (30 ÷ 30) — often deemed "fair": valuation exactly matches growth.
PEG fixes the P/E's blind spot by factoring in growth. A PEG below 1 suggests a stock undervalued relative to its growth; above 2, expensive. Caution: it relies on growth forecasts, which can be too optimistic.