PE Growth (PEG) FactorThe PEG Factor, is the price-earnings (PE) ratio divided by the earnings per share (EPS) growth rate. The PEG factor measures the relative cost of earnings growth at the previous day's closing share price. The formula is the following:
= PE ratio / EPS Growth Rate
The PEG ratio is a tool that can help investors find undervalued stocks. When used in conjuction with other ratios, and the sector, it provides investors a perspective of how the market views a firm's growth potential in relation to EPS growth.
- A PEG factor equal to one, means that the market is pricing the stock to fully reflect its EPS growth potential.
- A PEG factor greater than one, indicates that either the stock is overvalued, or that the market expects its future EPS growth to be greater than the current consensus.
- A PEG factor less than one, indicates that either the stock is undervalued, or that the market does not expect the company to achieve its forcasted EPS growth.