Is a lower PEG ratio a good investment?

A lower PEG ratio is better for a company's valuation, but investors should use the PEG ratio together with other metrics before making an investing decision. The acronym stands for price/earnings-to-growth, with examples of how to calculate it shown in the section below. A PEG ratio below a reading of 1.0 typically indicates an undervalued stock.

What is a PEG ratio?

The math behind the PEG ratio is straightforward. One simply divides a company’s P/E ratio by its expected rate of growth. A company with a P/E ratio of 20 and an expected growth rate of 10%, for example, would have a PEG ratio of 2 (20 / 10). As simple as the math is, there are complexities to the PEG ratio.

Why is a high PEG ratio better than a low PEG?

Typically, higher P/E ratios signal faster growth rates, but the PEG allows investors to compare stocks with high and low P/E ratios based on their growth rates. The PEG ratio also offers a simple way for investors to see how cheap a stock is relative to its growth rate. All things being equal, a lower PEG ratio is better.