The PEG ratio divides a company’s PE ratio by its expected annual earnings growth rate, adjusting the valuation for how fast the company is actually growing rather than treating all PE ratios as directly comparable.
For example, a company trading at a PE ratio of 20 with an expected earnings growth rate of 20% a year has a PEG ratio of 1.0 — its valuation roughly matches its growth. A company with the same PE of 20 but only 5% expected growth would have a PEG of 4.0, suggesting it’s priced richly relative to how fast it’s actually growing.
PEG ratio is most useful for screening growth stocks, where a high PE alone might wrongly filter out a company whose earnings are expanding fast enough to justify the price. It depends on a growth estimate, though, which is inherently less certain than historical figures, so it’s worth treating as a directional signal rather than an exact number.