How to calculate a PEG ratio

A look at how to find the PEG ratio for individual stocks.

Before you are able to find the PEG ratio, you must first know what the price to earnings ratio, or p/e ratio of your stock is.

Finding a price to earnings ratio is simple. Simply take the current stock price and divide it by the company's most recent full year earnings per share number. This information is easily found by going to Yahoo Finance or Google Finance. For example, if a company's stock price is $30 a share, and their most recent earnings per share was $2.00, then the stock has a p/e ratio of 15.

In order to find the PEG ratio, which is the Price to Earnings Growth ratio, we need to use the price to earnings ratio that we just found. Using the example from step 2 we start out with our p/e of 15. To find the peg ratio the p/e of 15 is then divided by the expected annual growth of the company. Let's say that the expected growth of this company is 10% per year. We then take 15/10 to get a PEG ratio of 1.5.

What exactly does the PEG ratio measure and what does it tell you? It measures how cheap or expensive a stock is relative to how fast it is growing. A PEG ratio under 1.00 is considered cheap, while a ratio over 2.00 is seen as expensive. The PEG ratio is a very helpful tool to use in valuing a stock's attractiveness!

Tips

  • Remember that with any valuation ratio, this shouldn't be used alone to buy or sell stocks, but in conjuction with other methods.

Warnings

  • The PEG ratio is dependant on projected earnings numbers, which can prove to be difficult to measure.