Short answer: The PEG ratio compares a stock’s price-to-earnings (P/E) multiple with its expected earnings growth rate. It adds a growth dimension that the plain P/E ratio lacks, so a fast-growing company’s higher P/E can be read against how quickly its earnings are expected to rise.
Last reviewed: 9 November 2026
At a glance
| Term | What it means | What to keep in mind |
|---|---|---|
| P/E ratio | The share price divided by earnings per share | Shows the price paid for each rupee of earnings, but ignores growth |
| EPS growth rate | The annual rate at which earnings per share are expected to rise, written as a percentage number | This is the input that makes PEG differ from P/E |
| PEG of 1 | Generally read as a fair balance between price and expected growth, a view attributed to investor Peter Lynch | A reading, not a verdict |
| Industry differences | Acceptable PEG levels differ across industries | Compare companies within the same sector |
| Growth forecasts | The ratio depends on estimates that may be unreliable | Small changes in the assumed growth rate can move the ratio sharply |
| Other measures | Earnings quality, cash flows and debt | Investors typically look at these alongside PEG |
How is the PEG ratio calculated?
You divide the P/E ratio by the annual earnings-per-share (EPS) growth rate. EPS is a company’s net profit divided by its number of shares, so it tells you how much profit belongs to each share. The growth rate is entered as a plain percentage number, so a 15 per cent growth rate becomes 15 in the formula.
The result is a single figure with no rupee unit attached. That is what allows you to set a company growing at 25 per cent beside one growing at 8 per cent, even though their P/E ratios may look very different on their own.
What does a PEG of 1 mean?
A PEG of exactly 1 is generally read as a fair balance between what a stock costs and how fast its earnings are expected to grow. The view is attributed to investor Peter Lynch. Under this reading, a P/E ratio equal to the growth rate is the point of balance.
A reading of 1 is a starting point for thinking, not a conclusion. Whether 1 is a sensible level depends on the sector and the company, which is covered below.
A hypothetical example in rupees
The figures below are invented for illustration and do not describe any real company. Suppose a company’s share price is ₹300 and its EPS is ₹15. Its P/E ratio is 300 divided by 15, which is 20.
If the expected annual EPS growth rate is 10, the PEG is 20 divided by 10, which gives 2.0. If the growth forecast is raised to 20, the PEG falls to 1.0. If the forecast is instead set at 12.5, the PEG becomes 1.6.
Notice that the share price and the P/E ratio never changed. Only the growth input moved, yet the PEG went from 2.0 to 1.0 and then to 1.6. This is why the growth forecast deserves as much scrutiny as the arithmetic.
Why do industries change what a good PEG looks like?
Acceptable PEG levels differ across industries. A company in one sector may typically trade at a different P/E ratio for the same growth rate than a company in another sector. Treating 1 as a universal cut-off would ignore those differences.
For this reason, PEG comparisons work best between companies in the same sector. Comparing a fast-growing consumer business with a slow-growing utility, for example, may tell you more about their sectors than about their value.
Where does the PEG ratio go wrong?
The biggest weakness is that the ratio depends on growth forecasts. Those forecasts may be unreliable, or they may be overly optimistic or overly pessimistic. Since the growth rate is the denominator, an error in it flows straight into the answer.
Because small changes in the assumed growth rate can move the ratio sharply, two careful analysts using slightly different forecasts can arrive at very different PEG readings. The hypothetical example above showed a move from 2.0 to 1.0 from a single change in the growth input.
Why can a low PEG be misleading?
A low PEG can reflect market doubt about whether growth will last. The market may be pricing in the possibility that the forecast growth rate will not be achieved, so the low figure may reflect that doubt rather than an overlooked opportunity.
This is why investors typically combine PEG with other measures before deciding anything. Earnings quality, cash flows and debt can show whether the growth in reported earnings is supported by actual cash and a manageable borrowing position. A PEG figure on its own does not show any of these.
Frequently asked questions
Is a PEG of 1 always the right level?
No single level is right for every company. A PEG of 1 is generally read as a fair balance between price and expected growth, a view attributed to Peter Lynch, but acceptable levels differ across industries.
Can I compare the PEG of companies in different sectors?
Comparisons work best within the same sector. Acceptable PEG levels differ across industries, so a reading that looks high in one sector may be typical in another.
Why does the PEG ratio change so much when forecasts change?
The ratio depends on growth forecasts, and small changes in the assumed growth rate can move it sharply. Since those forecasts may be unreliable, the PEG is only as dependable as the estimate behind it.
Is the PEG ratio enough on its own?
Investors typically combine PEG with other measures such as earnings quality, cash flows and debt. A low PEG can reflect market doubt about whether growth will last, so it is not a complete picture by itself.
Sources and last check
Facts in this article were checked against the sources below on 9 November 2026. Rules and figures can change; check the primary source before acting.
- groww.in (broker education)
- kotakneo.com (broker education)
- upstox.com (broker education)
- dhan.co (broker education)
This article is general information, not investment advice. MyFinanceBandhu is not a SEBI-registered investment adviser.