This PEG ratio calculator compares a stock’s price-to-earnings ratio with an estimated annual earnings growth rate. It calculates P/E from the share price and earnings per share, then estimates growth using the company’s earnings retention rate and return on equity.
Important: this calculator derives growth from financial inputs; it does not ask you to enter an analyst’s growth forecast. Its result is a valuation screening measure, not a prediction of investment returns.
How to use the PEG ratio calculator
Enter these four inputs, using financial figures from a consistent reporting period:
- Price per share: enter the stock’s market price in dollars.
- Earnings per share: enter annual earnings per share in dollars. Use the same currency as the share price, and note whether your EPS figure is trailing or forward-looking.
- Retention rate: enter the percentage of earnings the company retains rather than distributes as dividends. Enter 80 for 80%, not 0.80. This means earnings retention, not customer retention.
- Return on equity: enter annual ROE as a percentage. Enter 10 for 10%, not 0.10.
The calculator returns three results: P/E ratio, estimated earnings growth, and PEG ratio.
If you need to prepare the inputs, earnings retention is generally calculated as (net income − dividends) ÷ net income × 100. The retention ratio calculator can help with that step. ROE measures net income relative to shareholders’ equity, commonly using average equity; see the ROE calculator for details.
What does the PEG ratio measure?
PEG stands for price/earnings-to-growth. It extends the simple P/E ratio by considering growth: a higher earnings multiple may be easier to justify when earnings are growing faster.
For a given P/E ratio, higher estimated growth produces a lower PEG ratio. For a given growth rate, a higher share price produces a higher PEG ratio. Neither relationship, by itself, establishes whether a stock is fairly valued.
PEG ratio formula
The standard relationship is:
PEG ratio = P/E ratio ÷ annual earnings growth rate expressed as a percentage number
For example, use 8 in the denominator for 8% growth—not 0.08.
How this calculator estimates growth
This calculator uses the following equations:
- P/E ratio = Price per share ÷ Earnings per share
- Estimated earnings growth (%) = Retention rate (%) × ROE (%) ÷ 100
- PEG ratio = (Price per share ÷ Earnings per share) ÷ [Retention rate (%) × ROE (%) ÷ 100]
The growth calculation uses the relationship between retained earnings and return on equity, commonly associated with sustainable growth analysis. It estimates how reinvested profits could support growth if profitability and financing conditions remain stable. Translating that relationship into earnings-per-share growth also assumes that changes in the share count do not materially alter the outcome.
This estimate is not the same as observed EPS growth or an analyst forecast. A PEG ratio published elsewhere may use a different growth assumption or forecast horizon, so it may differ even when the P/E ratio is identical.
Worked example: calculating a PEG ratio of 1.25
Suppose ACME Corp. has the following figures:
| Input | Value |
|---|---|
| Price per share | $10 |
| Annual earnings per share | $1 |
| Earnings retention rate | 80% |
| Annual return on equity | 10% |
The $1 EPS could represent $10 million in earnings available to common shareholders divided by 10 million weighted-average common shares. You can check that input with the earnings per share calculator.
- Calculate P/E: $10 ÷ $1 = 10.
- Estimate annual growth: 80 × 10 ÷ 100 = 8%.
- Calculate PEG: 10 ÷ 8 = 1.25.
The result means the stock has a P/E of 10 relative to modeled annual growth of 8%. It does not mean the expected investment return is 1.25% or that the stock is 25% overvalued.
What is a good PEG ratio?
A PEG ratio of 1 is a common screening reference, not a universal fair-value threshold.
| PEG result | Common screening interpretation | What to check next |
|---|---|---|
| Below 1 | The P/E is numerically lower than the percentage growth estimate. | Is the growth assumption realistic, and does the company face unusual risks? |
| Around 1 | The P/E and percentage growth estimate are numerically similar. | Do cash flow, debt, and business quality support the valuation? |
| Above 1 | The P/E is numerically higher than the percentage growth estimate. | Could durable earnings, lower risk, or dividends help explain the higher multiple? |
A low PEG can identify a stock worth researching, but it does not prove undervaluation. Likewise, a high PEG is not automatically a reason to sell. Comparisons are more useful when companies have similar business models, earnings definitions, and growth assumptions.
When can the result be misleading?
- Zero or negative earnings: zero EPS makes P/E undefined. Negative EPS does not produce a meaningful conventional PEG valuation.
- Zero or negative modeled growth: zero retention or zero ROE makes the PEG denominator zero. Negative growth or negative ROE makes the usual “lower is better” interpretation unreliable.
- Temporary earnings or unusually high ROE: one-time gains can inflate earnings, while high leverage or a small equity base can inflate ROE. Either can make the valuation look more attractive than the underlying business warrants.
- Retained earnings may earn different returns: historical ROE does not guarantee that newly reinvested profits will achieve the same profitability.
- Different industries and business stages: capital requirements, cyclicality, competitive risks, and growth durability affect valuation. A lower PEG than a peer’s is not proof that a stock is cheaper on a risk-adjusted basis.
- Dividends and financing changes: PEG does not directly value dividends. Buybacks, new share issuance, and changes in borrowing can also weaken the link between retained earnings and EPS growth.
Keep the growth basis consistent when comparing stocks. To check whether the modeled rate resembles historical performance, use the earnings per share growth calculator. Historical growth provides context, not confirmation of future growth.
How to apply your result
Use PEG to narrow a research list, then test the assumptions behind an attractive result. Review several years of earnings and ROE rather than relying on an unusually strong year, and investigate whether the company has profitable opportunities to reinvest retained earnings.
You can also change one input at a time to assess sensitivity. In the example above, reducing retention from 80% to 60%, while holding the other inputs constant, reduces modeled growth to 6%. PEG rises from 1.25 to approximately 1.67. That does not necessarily mean shareholders are worse off: lower retention may accompany higher dividend distributions, which this ratio does not capture.
Other measures to review alongside PEG
- Debt-to-equity ratio helps assess leverage, especially when high ROE drives a low PEG.
- Free cash flow helps you examine whether reported profits translate into cash after capital expenditures.
- Dividend yield adds context when a company distributes a substantial portion of its earnings.
- The PVGO calculator explores the portion of a stock’s value attributed to future growth opportunities under its valuation assumptions.
Keep valuation separate from portfolio management. The stock cost basis calculator helps track purchase costs, while the hedge ratio calculator addresses a different question: the size of a hedge rather than whether a stock is attractively priced.
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