How The PEG Ratio Can Help Investors

The PEG (price/earnings to growth) ratio is a tool that can help investors find undervalued stocks. It’s not as well known as its cousins, the P/E and P/B ratios, but it is just as valuable. When used in conjunction with other ratios, it gives investors a perspective of how the market views a stock’s growth potential in relation to EPS growth.

What the PEG Ratio Is:
The PEG ratio compares a stock’s price/earnings (“P/E”) ratio to its expected EPS growth rate. If the PEG ratio is equal to one, it means that the market is pricing the stock to fully reflect the stock’s EPS growth. This is “normal” in theory because, in a rational and efficient market, the P/E is supposed to reflect a stock’s future earnings growth.