Investology > PEG

PEG

PEG (Price/Earnings-to-Growth) is a streamlined valuation measure that compares a stock’s price relative to its earnings growth potential, but unlike the PEG Ratio, it doesn’t divide by growth - it multiplies. That subtle distinction flips the lens: instead of asking “how much growth am I getting per unit of price,” PEG asks, “how much price am I paying in relation to expected growth.”

Price/Earnings-to-Growth

PEG (Price/Earnings-to-Growth) is a streamlined valuation measure that compares a stock’s price relative to its earnings growth potential, but unlike the PEG Ratio, it doesn’t divide by growth – it multiplies. That subtle distinction flips the lens: instead of asking “how much growth am I getting per unit of price,” PEG asks, “how much price am I paying in relation to expected growth.”

Think of PEG as the sibling of PEG Ratio: same family, different personality. If PEG Ratio is the judge handing out fair-value verdicts, PEG is more like the prosecutor, pressing on whether the valuation burden grows heavier as growth rates change.

PEG = P/E Ratio × (Growth Rate as a decimal)

Why PEG Matters in Stock Analysis:

  • Alternative Lens: PEG Ratio normalizes price by growth, while PEG stacks them together—giving analysts a sense of the absolute burden of valuation when growth is factored in.
  • Bubble Sensitivity: PEG can make overheated stocks “pop out” faster – if both P/E and growth are high, the product balloons, highlighting stretched expectations.
  • Relative Stress Test: Useful when comparing stocks within the same sector where growth rates are similar, because the multiplication emphasizes how much “valuation weight” each carries.
  • Forward-Looking Simplicity: Particularly handy when growth forecasts are already modest – PEG makes it clear when even decent growth can’t save a high-P/E stock.

Example

Suppose Nvidia (NASDAQ: NVDA) trades at a P/E of 35 with forecasted growth of 18%.

  • PEG = 35 × 0.18 = 6.3.
    That result signals investors are carrying a heavy valuation burden relative to growth – even more starkly than the PEG Ratio (35 ÷ 18 = 1.9). It underlines the market’s exuberance for Nvidia’s AI dominance but also the razor-thin margin for disappointment.

Bottom Line

PEG and PEG Ratio are two sides of the same growth-valuation coin. PEG Ratio is more common, especially among growth investors, because it scales valuation down by growth to find “fair value.” PEG, on the other hand, amplifies valuation against growth, making it a sharper tool for spotting when excitement has run way ahead of fundamentals.