PEG Ratio

PEG = P/E Ratio ÷ Expected Earnings Growth Rate.

A PEG of 1 is considered 'fairly valued'. Below 1 may be undervalued. Above 1 may be overvalued.

It is more useful than P/E alone because a high P/E is justified if the company is growing fast.

The PEG ratio is especially useful in the Indian market where many quality companies trade at seemingly high P/E ratios. Bajaj Finance, for example, often trades at a P/E of 35-40, which looks expensive at first glance. But if its earnings are growing at 25-30% per year, the PEG ratio is only 1.2-1.6, which is actually reasonable for a high-growth financial company.

When screening stocks on NSE, PEG helps you avoid two common traps. First, the 'value trap', a stock with a low P/E of 8 might seem cheap, but if its earnings are declining at 5% per year, the PEG is negative, signaling a deteriorating business. Second, the 'growth trap', a stock with a P/E of 80 and only 10% growth has a PEG of 8, meaning you are massively overpaying for the growth you are getting.

In practice, Indian analysts consider a PEG below 1 as potentially undervalued, between 1 and 1.5 as fairly priced, and above 2 as expensive. However, for truly exceptional companies with strong competitive advantages, like Asian Paints in decorative paints or HDFC Bank in private banking, investors are sometimes willing to pay a PEG of 1.5-2 because of the business quality and consistency.

You can calculate PEG yourself using data from any stock screener. Take the current P/E ratio from NSE or your broker app, and divide it by the expected earnings growth rate (usually the consensus analyst estimate for the next 1-2 years). Many Indian financial websites and apps now show PEG directly, making it easy to compare across stocks without manual calculation.