How the PEG ratio works

PEG asks how many times earnings you are paying per point of expected EPS growth:

$$\text{PEG} = \frac{P/\text{EPS}}{g_{\%}}$$

On a $50 share with $2.50 of EPS, P/E is 20. Expected growth of 10 percent is the number 10, not 0.10. PEG is $20 / 10 = 2$. Dividing 20 by 0.10 prints 200, which is not the PEG anyone quotes. With 100,000,000 shares, market capitalisation is $5,000,000,000 and total earnings are $250,000,000. P/E from the totals is the same 20: $5000000000 / 250000000 = 20$. PEG does not care which route produced the 20.

The PEG calculator on this page is that division. The PEG explorer holds P/E still and lets you drag growth. A PEG of 1 is the folklore fair reading: the multiple equals the growth points. It is a convention, not a valuation identity.

How earnings per share works owns the dollar in the P/E denominator. This page owns the extra division by $g_{\%}$.

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 growth forecast did not move. The year got more profitable. PEG followed P/E down because P/E is the numerator. That is why a PEG screen is a P/E screen wearing a growth coat: if the growth input is copied across the table, ranking by PEG is ranking by P/E.

Price $80, EPS $2.50, shares 50,000,000, expected growth 8 percent. P/E is 32. PEG is 4. Market cap is $4,000,000,000. Earnings are $125,000,000.

The 4 is 32 over 8, not a more expensive share in dollars. Two things moved against the first sheet: the multiple rose from 20 to 32, and the growth points fell from 10 to 8. Either move alone would have raised PEG. Together they take it from 2 to 4. The firm is also smaller than the $5,000,000,000 first sheet. PEG hides scale the way P/E does.

P/E against PEG is that pair as a table. How earnings yield works is the reciprocal of the same multiple, with no growth input at all.

It is not a P/E. It is not a growth rate. It is not a yield. A PEG of 2 can be a 20 times stock expected to grow at 10 percent, or a 40 times stock expected to grow at 20 percent. Those are different claims on different earnings paths.

It is not sustainable growth. Sustainable $g$ is ROE times retention, an accounting identity. PEG's growth input is an expected EPS growth rate, often a five-year analyst number. Mixing them is how a 9 percent book $g$ gets read as the 10 in the PEG denominator.

When EPS is zero or negative, P/E stops, and so does PEG. Dividing a price by a loss does not produce a multiple, and dividing that nonsense by a growth rate does not repair it. When expected growth is zero, the division stops. This calculator prints no PEG in those cases rather than a nonsense figure.

Trailing P/E over forward growth is a mix. Forward P/E over trailing growth is a different mix. Name both pieces before lining two PEG figures up. Type the EPS and the growth points your sheet is using. They are not interchangeable.

It is not a bargain screen, not a five-year forecast, and not a trailing-against-forward switch. The three sheets are a $50 share on $2.50 of EPS growing at 10 percent (P/E 20, PEG 2, earnings $250,000,000), the same price on $5.00 of EPS (P/E 10, PEG 1), and an $80 share growing at 8 percent (P/E 32, PEG 4, earnings $125,000,000). This is educational material, not financial advice.