Does a lower PEG ratio mean a stock is undervalued?

A low PEG ratio alone cannot be used to judge that a stock is undervalued. The expected future earnings growth rate is only a forecast, and actual results may fall short of expectations, so it is common to check the PEG ratio together with other metrics.

Which figure is used for the earnings growth rate?

Figures such as the actual growth rate over the past several years, or growth rate forecasts published by securities firms or the company itself, are commonly used. Note that the result of the calculation can change depending on which figure is used.

PEG Ratio

The PEG ratio (Price Earnings Growth Ratio) divides the PER (price-earnings ratio) by the earnings-per-share growth rate, in an attempt to measure the level of a stock's price while factoring in its growth potential.

PEG Ratio (times) = PER (times) ÷ EPS Growth Rate (%)

What It Measures

Looking at PER alone, companies with higher growth expectations tend to show higher figures, which makes it difficult to judge whether a stock is expensive or cheap. The PEG ratio divides PER by the earnings growth rate in an attempt to measure the level of a stock's price after factoring in its growth potential.

How to Interpret It, and Points of Caution

A PEG ratio of around 1x is sometimes discussed as a rough benchmark, but this is merely an empirical rule of thumb, and the appropriate level varies by industry and market conditions. In addition, there is no guarantee that the forecast growth rate will actually be achieved, so it is not appropriate to make investment decisions based on this metric alone.

This article is provided for general informational purposes only and does not recommend or solicit the purchase or sale of any specific investment method or security. Final investment decisions are your own responsibility.

Frequently Asked Questions

Does a lower PEG ratio mean a stock is undervalued?: A low PEG ratio alone cannot be used to judge that a stock is undervalued. The expected future earnings growth rate is only a forecast, and actual results may fall short of expectations, so it is common to check the PEG ratio together with other metrics.
Which figure is used for the earnings growth rate?: Figures such as the actual growth rate over the past several years, or growth rate forecasts published by securities firms or the company itself, are commonly used. Note that the result of the calculation can change depending on which figure is used.