Chartered Financial Analyst (CFA) Practice Exam Level 2 - 2025 Free CFA Level 2 Practice Questions and Study Guide

The PEG ratio, which stands for Price/Earnings to Growth ratio, is a valuation metric that helps investors understand the relationship between a company’s price-to-earnings (P/E) ratio and its expected future growth rate. It provides a more comprehensive view than the P/E ratio alone, as it takes into account the anticipated growth in earnings.

By using the PEG ratio, investors can assess whether a stock is overvalued or undervalued based on expected growth rates. A PEG ratio of 1 is generally considered to indicate that the stock’s price is fairly valued relative to its earnings growth. A PEG ratio less than 1 may suggest that the stock is undervalued, while a ratio greater than 1 might indicate overvaluation.

This focus on both price and growth together offers a better perspective for evaluating potential investments, particularly for high-growth companies, enabling investors to make more informed comparisons across different firms within the same industry or sector.