Peg ratio

The P/E divided by the expected earnings growth rate in per cent. A lower value suggests cheapness relative to growth, but it assumes a straight-line link and ignores risk and how long growth lasts.

Where you will meet it

Peg ratio appears in 2 learning outcomes on the CFA syllabus. A few of them:

• Work out the PEG (P/E-to-growth) ratio, explain what it means and how it is used in relative valuation
  CFA Level II · Equities

  “The PEG ratio divides the P/E by the expected earnings growth rate expressed in percentage points, so a P/E of 20 with 10% growth gives a PEG of 2.”

• Judge from comparisons of multiples whether a stock is priced too high, too low or fairly
  CFA Level II · Equities

  “A PEG ratio, or a P/B read alongside ROE, can help control for this.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with P · Glossary