PEG ratioThe PEG ratio or price to earnings ratio is a competitor to the PE ratio. The PEG has become popular because it factors in earnings growth as well as present earnings.
The equation for PEG looks like this. PEG= (P/E ratio)/ (Earnings growth) You simply divide the P/E by the percentage you are expecting the company's earnings to grow. For example if you have a company with a PE of 40 and the company’s earnings grow an average of 20% annually the equation would look like this. PEG= 40/20 or 2. In this case the Price to earnings ratio would equal 2. The lower the PEG ratio is the better it is said to be. A stock with a PEG of .7 is considered a better buy then a stock with a PEG of 2. 1 is also said to be the magic number for this study. If the PEG is at 1 it is suppose to be at a fair market value. If it is over 1 it is overvalued, and of course if it is less than 1 it is undervalued or cheap. Because this takes into consideration future growth many people believe it is more accurate then P/E which is only focused on the here and now. This study can work against you as a trader. If you are expecting a company’s earnings to increase 35% but they only increase 16% it could have been disadvantageous to use it. Because of this the PEG should never been token as a standalone indicator. 
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