The price-to-earnings growth ratio divides the P/E ratio by the company's expected earnings growth rate. It helps you compare whether a stock's valuation is reasonable relative to how fast the company is expected to grow. This ratio can help distinguish between a stock that is expensive because it's overvalued versus one that is expensive because growth expectations are high.
Company A has a P/E ratio of 30 and is expected to grow earnings by 30% per year, giving it a PEG ratio of 1.0. Company B has a P/E ratio of 20 but is only expected to grow 5% per year, giving it a PEG ratio of 4.0. The higher PEG ratio for Company B suggests its stock price may be less justified by its growth prospects.
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