P/E vs PEG ratio
P/E is price over EPS. PEG is that P/E divided by expected EPS growth in percent. A $50 share on $2.5 of earnings growing at 10 percent is a P/E of 20 and a PEG of 2.
| P/E | PEG | |
|---|---|---|
| Formula | Price / EPS. | P/E / g_%, with g_% in percentage points. |
| Teaching sheet | $50 / $2.5 = 20 times. Market cap $5,000,000,000. Earnings $250,000,000. | 20 / 10 = 2. Growth of 10 means ten, not 0.10. |
| When EPS doubles | P/E falls to 10 on the still $50 share. Earnings are $500,000,000. | PEG falls to 1. The growth forecast did not move. The year got more profitable. |
| Slower growth | An $80 share on $2.5 of EPS with 50,000,000 shares is 32 times on $4,000,000,000 of market cap. | Growth of 8 percent makes PEG 4. Higher multiple and slower growth stack. |
| What it is not | A bargain screen. A low P/E can be peak earnings that will not repeat. | A yield, a growth rate, or a fair-value identity. A PEG of 1 is a convention. |
On this page
The multiple, and the multiple over growth
P/E is price over EPS. On a $50 share with $2.5 of earnings, the multiple is 20. With 100,000,000 shares, market capitalisation is $5,000,000,000 and total earnings are $250,000,000.
PEG divides that 20 by expected EPS growth in percentage points. Growth of 10 percent is the number 10. PEG is . How the P/E ratio works owns the 20. How the PEG ratio works owns the extra division. How earnings per share works owns the dollar in the P/E denominator.
Dividing 20 by 0.10 prints 200, which is not the PEG anyone quotes. The 10 is ten points.
Hold growth still and PEG follows P/E
Keep the $50 price, 100,000,000 shares, and 10 percent expected growth. Raise EPS to $5. P/E falls to 10. PEG falls to 1. Market cap is still $5,000,000,000. Earnings are $500,000,000. The forecast did not change.
The third sheet stacks a higher multiple with slower growth: an $80 share on $2.5 of EPS, 50,000,000 shares, 8 percent expected growth. P/E is 32. PEG is 4. Market cap is $4,000,000,000. Earnings are $125,000,000. PEG hides scale the way P/E does.
P/E against earnings yield is the same multiple flipped. This is educational material, not financial advice.
Worked examples
A \$50 share growing at 10 percent
The share price is $50, EPS is $2.5, expected EPS growth is 10 percent, and 100,000,000 shares are outstanding. What is P/E, and what is PEG?
- P/E is price over EPS: .
- Market cap: , so $5,000,000,000.
- Total earnings: , so $250,000,000.
- PEG is P/E over the growth points: .
P/E is 20. PEG is 2. Market cap is $5,000,000,000. Earnings are $250,000,000.
The same growth on \$5 of EPS
Keep the $50 price, 100,000,000 shares, and 10 percent expected growth. EPS is now $5. What is PEG?
- P/E: .
- Market cap is still $5,000,000,000.
- Total earnings: , so $500,000,000.
- PEG: .
P/E falls to 10. PEG falls to 1. Market cap is still $5,000,000,000. Earnings are $500,000,000.
An \$80 share growing at 8 percent
Price is $80, EPS is $2.5, shares 50,000,000, expected growth 8 percent. What is PEG?
- P/E: .
- Market cap: , so $4,000,000,000.
- Total earnings: , so $125,000,000.
- PEG: .
P/E is 32. PEG is 4. Market cap is $4,000,000,000. Earnings are $125,000,000.
Common questions
Is a PEG below 1 a bargain?
It is a multiple below the growth points on this convention. The 1 on the second sheet is a more profitable year on a still $50 share, not a sale price.
Why divide by 10, not 0.10?
Because the usual quote is P/E over the growth rate in percent. 20 over 10 is 2. 20 over 0.10 is 200, which nobody means.
Does PEG replace P/E?
No. PEG is P/E wearing a growth coat. If the growth input is copied across a table, ranking by PEG is ranking by P/E.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.