PEG Ratio: What It Is and How to Use It for Smarter Stock Picks

When you're looking at a stock, the PEG ratio, a valuation metric that adjusts the P/E ratio for a company’s expected earnings growth. Also known as the price/earnings-to-growth ratio, it tells you whether a high P/E is justified by future growth—or if the stock is just overhyped. Most investors check the P/E ratio first, but that’s like looking at a car’s speedometer without checking the fuel gauge. The PEG ratio adds the missing piece: growth. A stock trading at 20x earnings might seem expensive, but if it’s growing earnings 25% a year, its PEG is under 1—which many pros consider a buy.

The P/E ratio, the classic measure of how much investors pay for each dollar of earnings tells you what the market thinks today. But the earnings growth, the rate at which a company’s profits are increasing year over year is what drives prices tomorrow. A company with a P/E of 30 and 15% growth has a PEG of 2—likely overpriced. One with a P/E of 15 and 20% growth? PEG of 0.75—that’s the kind of value serious investors hunt for. And while you’re at it, don’t forget dividend stocks, companies that pay regular cash returns to shareholders. Many of them have steady, predictable growth, making the PEG ratio especially useful. You don’t want to chase a high-yield dividend from a company whose earnings are falling—it’s a trap.

The PEG ratio isn’t perfect. It relies on forward earnings estimates, which analysts often get wrong. But used alongside other tools—like cash flow checks, debt levels, and industry trends—it cuts through the noise. You’ll find it in the posts below, where real investors break down how they use it to avoid overpaying for hype, spot hidden gems in slow-growth sectors, and filter out dividend traps that look good on paper but are falling apart underneath. Whether you’re just starting out or looking to refine your strategy, the tools and examples here will help you turn numbers into decisions.