Imagine 2 companies who both have a P/E ratio of 20, but one company expects that its profits this year will double, while the other company expects profits to stay the same 👯

All things being equal, shouldn’t the first company be worth more than the second company, given they’ll make more money this year? 🚀

This is where PEG ratio comes in handy!

PEG ratio is a metric that compares a company's P/E ratio to its expected earnings growth rate over some period of time, typically a year 📊

In other words, it's a way to tell where a stock’s price is trading at relative to both its profits AND how fast its profits are growing 💡

To calculate the PEG ratio, take the company's P/E ratio and divide it by its expected annual earnings growth rate, which is the percentage that they expect their profits to grow this year 🧮

For example, if a company has a P/E ratio of 20 and expects to grow earnings by 10% this year, its PEG ratio would be 20 ➗10 = 2 🤓

A lower PEG ratio indicates a stock’s price is lower, or "cheaper", relative to its earnings and earnings growth rate, which indicates that it may be a good investment opportunity.

In particular, a PEG ratio between 0 and 1 is considered “low” (which is good) while a PEG ratio greater than 1 is considered "high" (which is less good) 😬

A negative PEG ratio means a company is either losing money, or its earnings are projected to shrink over time – neither of which are good signs! 😱