PEG ratio
The price to earnings ratio divided by growth, as a rough test of whether a rich multiple is earned.
PEG = price to earnings / annual earnings growth rate, in percentWhat it means
A P/E of 40 is expensive for a company growing at 5% and cheap for one growing at 40%. PEG expresses that in one number by dividing the multiple by the growth rate, with 1.0 as the rough dividing line: below it the growth more than covers the multiple, above it the price is running ahead.
It is a rule of thumb rather than a valuation, and its precision is entirely borrowed from the growth estimate in the denominator, which is usually somebody's forecast.
Worked example
A P/E of 20x and earnings growing at 15% a year.
- 120 / 15 = 1.33.
A PEG of 1.33: the multiple is somewhat ahead of the growth.
Every example in this glossary describes the same imaginary company, so the figures join up as you move between metrics.
How investors read it
- Check which growth rate is in the denominator — last year's, the next few years' forecast, or a long-run estimate. The three give very different answers.
- It flatters companies growing from a small base, where a high percentage is arithmetic rather than achievement.
- It ignores risk and capital intensity, so two companies with the same PEG can be nothing alike.
Where it misleads
- It breaks entirely for companies with no earnings or no growth, and misbehaves when either is near zero.
- Growth in earnings can come from buybacks rather than the business, and the ratio cannot tell the difference.
- The 1.0 threshold is folklore. It has no theoretical basis and is not stable across interest-rate regimes.
How Materiality uses it
Not computed anywhere in this product, deliberately. It needs a forward earnings growth rate, and the only ones available are analyst forecasts whose coverage is thin outside large companies and whose horizon varies by source — a number that would be missing for many stocks and not comparable between the rest. The scorecard scores growth and valuation as separate categories instead, using measured historical growth on one side and forward P/E, EV/EBITDA, free cash flow yield and price to sales on the other, which keeps the estimate and the fact apart.
The full methodology covers where the figures come from, how the statements are normalised, and what is deliberately left unadjusted.
Related metrics
Price to earnings
What you pay per dollar of annual profit.
Revenue growth
How fast the top line is expanding, usually compounded across several years.
Earnings per share
The company's profit divided across its shares — the only profit figure an owner actually receives a slice of.
EV/EBITDA
What the whole business costs, per dollar of pre-depreciation operating profit.
A metric on its own is a number without a business attached to it. Materialitycomputes these from a company's own SEC filings, several years of them at once, and explains what the pattern means rather than leaving you to hold fifteen definitions in your head.