P/E Ratio vs PEG Ratio: Which Valuation Metric to Use
Short answer. The P/E ratio is share price divided by earnings per share: what you pay for each dollar of profit. The PEG ratio divides the P/E by the expected annual earnings growth rate, so a fast grower with a high P/E can look reasonable. A PEG near 1 is traditionally read as fair value, below 1 as cheap and above as expensive.
Side by side
| P/E ratio | PEG ratio | |
|---|---|---|
| Formula | Price / earnings per share | P/E / expected annual EPS growth (%) |
| Accounts for growth | No | Yes |
| Example | Price $50, EPS $2.50: P/E 20 | P/E 20, growth 20%: PEG 1.0 |
| Best for | Mature, stable companies | Growth companies |
| Weakness | Misleading for fast growers or cyclicals | Depends on a growth forecast that may be wrong |
| Rule of thumb | Compare to peers and history | About 1 is fair; below 1 may be cheap |
Which one fits you?
Lean towards P/E ratio if…
- you compare mature companies in the same sector
- you want a quick, forecast-free measure
Lean towards PEG ratio if…
- you compare companies growing at different rates
- you want to avoid dismissing fast growers for their high P/E
Frequently asked questions
Which growth rate goes in PEG?
Usually a 3-5 year analyst forecast of EPS growth. Different sources lead to different PEGs, so use the same source across companies.
Is a low P/E always cheap?
No. Low multiples can reflect weak prospects. See value traps.
Can PEG be negative?
Yes, with negative earnings or growth, and then it is not meaningful.
General education, not personal financial advice. Figures are typical US examples and vary by provider and year.