Everyone by now would be knowing what a P/E (PE) ratio is. PEG ratio is just one step ahead of PE ratio. Below is the mathematical calculation for it,

PEG = [ (P/E) / (Growth) ]

Growth is year on year growth in %. For example, for stock "A" with P/E of 20 and growth of 50% will have a PEG ratio of 0.40 (20 / 50) . Stock "B" with a P/E of 30 and growth of 60% will have a PEG ratio of 0.50 (30 / 60). Stock "C" with a P/E ratio of 15 and growth of 15% will have a PEG ratio of 1.

In the above example, Stock "A" with least PEG ratio is the most attractive, followed by stock "B" and then stock "C". But, most investors get deceived by stock "C" for its least P/E and make mistakes. Generally, PEG ratio of less than 0.50 is considered an attractive buy and anything above 1 is expensive.

Of-course the PEG ratio becomes more decisive when growth taken into calculation is cumulative growth for 5 years or more which brings in the consistency factor.