PEG (price/earnings to growth)

The PEG (Price/Earnings to Growth) is a valuation multiple that divides a company's Price-to-earnings ratio (PER) by its expected growth rate of earnings per share. Where the P/E alone says nothing about the pace of earnings, the PEG puts it in perspective: a high P/E may be justified by rapid growth, and the PEG seeks precisely to measure whether the price paid remains reasonable relative to that growth.

‍

By convention, a PEG close to 1 is often read as a sign of balance between valuation and growth, a PEG well above 1 possibly signalling overvaluation and a PEG below 1 a relative opportunity. This reading stays indicative: it depends on the reliability of the growth forecasts used and is always compared with peers in the same sector.

‍

Concretely, a company trades at 20 times earnings and sees its earnings grow by 20% a year: its PEG works out at 1.0, deemed balanced. At growth of only 10%, the same P/E of 20 would give a PEG of 2.0, a signal of stretched valuation relative to the actual earnings dynamic.

‍

In practice, the PEG is used mainly for technology or fast-growing companies, for which an apparently high P/E may mask a dynamic earnings trajectory. In the business valuation of an unlisted SME, it is applied only with caution, future growth being more uncertain and comparables fewer.