Price Earning Growth (PEG) Ratio is a financial metric used to determine whether a stock is overvalued or undervalued by considering both its Price-to-Earnings (P/E) ratio and the companyís earnings growth rate. It helps investors make more informed decisions by adding a growth perspective to the traditional P/E ratio.

The PEG ratio formula is simple: PEG = P/E Ratio ˜ Annual EPS Growth Rate. For example, if a company has a P/E ratio of 20 and its expected earnings growth rate is 10%, the PEG ratio will be 2. A PEG ratio of 1 is generally considered fair value, indicating the stock price aligns with its earnings growth. A PEG ratio below 1 may suggest the stock is undervalued, while a value above 1 could imply overvaluation.

Unlike the P/E ratio, which looks only at current or past earnings, the PEG ratio incorporates future growth expectations, offering a more forward-looking perspective. This makes it especially useful for comparing companies in the same industry or sector, where growth rates may differ significantly.

However, investors should interpret the PEG ratio carefully. The accuracy of the ratio depends on reliable earnings growth estimates, which can vary with market conditions, management guidance, or analyst forecasts. Moreover, it may not be suitable for companies with unpredictable or negative earnings growth.

In summary, the PEG ratio provides a balanced view of valuation and growth, making it a valuable tool for fundamental analysis. When used alongside other financial metrics like return on equity (ROE), debt-to-equity ratio, and free cash flow, it helps investors assess the true potential of a stock before making an investment decision.