When you look at a stock, one of the first questions you ask is: "Is this stock cheap or expensive?"
Two of the most commonly used tools to answer that question are the PE ratio and the PEG ratio. If you have heard these terms but are not sure what they mean or how they differ, this guide is for you — with simple examples using Indian companies you already know.
What is the PE Ratio?
PE stands for Price-to-Earnings.
The PE ratio tells you how many rupees you are paying for every ₹1 of profit a company earns.
PE Ratio = Current Stock Price ÷ Earnings Per Share (EPS)
EPS = Net Profit ÷ Total Number of Shares
Example — ABC Ltd:
- Stock price: ₹500 | Net profit: ₹100 crore | Shares: 10 crore
- EPS = ₹10 → PE = ₹500 ÷ ₹10 = 50
A PE of 50 means you are paying ₹50 for every ₹1 of annual profit.
What Does the Number Mean?
| PE Ratio | What It Suggests |
|---|---|
| Below 15 | Potentially cheap (but always ask why) |
| 15 – 25 | Generally fair for stable, mature companies |
| 25 – 50 | Market expects strong future growth |
| Above 50 | Very high expectations — risky if growth disappoints |
⚠️ These are rough guidelines, not rules. A PE of 60 can be reasonable for a fast-growing company. A PE of 12 can still be expensive for a declining business. Always compare PE within the same sector.
Indian Sector Context
| Sector | Typical PE Range |
|---|---|
| FMCG (HUL, Nestle) | 50 – 80 |
| IT (TCS, Infosys) | 25 – 35 |
| Banking (HDFC Bank, ICICI Bank) | 15 – 25 |
| Auto (Maruti, Bajaj Auto) | 20 – 40 |
| PSU Banks | 5 – 12 |
Comparing a bank's PE to an FMCG company's PE makes no sense. Always compare within the same sector.
The Big Problem With PE Ratio
PE ratio has one major blind spot: it completely ignores growth.
Company A: Stock ₹200, EPS ₹10, PE = 20, profit growing at 5% per year Company B: Stock ₹400, EPS ₹10, PE = 40, profit growing at 40% per year
PE alone says Company A looks cheaper. But Company B is growing 8× faster. You may actually be getting far better value with Company B despite the higher price.
This is exactly where the PEG ratio comes in.
What is the PEG Ratio?
PEG stands for Price/Earnings-to-Growth.
Popularised by legendary investor Peter Lynch in One Up On Wall Street:
"The PE ratio of any company that is fairly priced will equal its growth rate."
PEG Ratio = PE Ratio ÷ Annual EPS Growth Rate (%)
Use the growth rate as a number — if earnings grow at 25%, use 25, not 0.25.
Applying it to the same example:
- Company A: PEG = 20 ÷ 5 = 4.0
- Company B: PEG = 40 ÷ 40 = 1.0
The picture reverses completely. Company B at PEG 1.0 is far more reasonably priced than Company A at PEG 4.0 — despite Company A's lower PE.
How to Interpret PEG
| PEG Ratio | What It Suggests |
|---|---|
| Below 1.0 | Potentially undervalued — growth at a discount |
| Around 1.0 | Fairly valued — price matches growth |
| Above 1.0 | Potentially overvalued — paying a premium over growth |
| Negative | Not useful — negative EPS or shrinking profits |
Peter Lynch's rule: PEG below 1 is a good sign. Below 0.5 is a strong signal. Use it as a starting point, not a final verdict.
A Complete Indian Stock Example
Two IT companies, illustrative numbers:
| Company X | Company Y | |
|---|---|---|
| Stock Price | ₹3,000 | ₹1,500 |
| EPS (Annual) | ₹100 | ₹75 |
| EPS Growth Rate | 12% per year | 25% per year |
| PE | 30 | 20 |
| PEG | 30 ÷ 12 = 2.5 | 20 ÷ 25 = 0.8 |
PE says Company Y is cheaper at 20 vs 30. PEG tells the real story — Company Y at 0.8 may be a genuine bargain, while Company X at 2.5 is overpriced relative to its growth rate.
Where Does the Growth Rate Come From?
This is where most investors get confused — because there are actually two versions of the PEG ratio, and they use different growth inputs.
Trailing PEG
Uses the company's actual historical earnings growth — typically the average EPS growth over the past 3 to 5 years.
Trailing PEG = PE Ratio ÷ Historical EPS Growth Rate (3–5 year average)
Pros: Based on real, reported numbers. No guesswork. Cons: Backward-looking. Past growth may not continue.
Forward PEG
Uses projected future earnings growth. This projection can come from two sources:
- Analyst estimates — Research reports from brokerages and fund houses forecasting EPS growth 1–3 years ahead
- Company guidance — What management themselves project in earnings calls and investor presentations
Forward PEG = PE Ratio ÷ Projected EPS Growth Rate
Pros: More relevant to what the market is pricing in today. Cons: Estimates can be wrong. Company guidance tends to be optimistic.
⚠️ Important: When you see a PEG ratio quoted in a news article or screener, always check whether it uses trailing or forward growth. The same stock can look undervalued on one and overvalued on the other.
Which Should You Use?
| Situation | Use |
|---|---|
| Beginners, first-time analysis | Trailing PEG (historical data is factual) |
| Comparing high-growth companies | Forward PEG (market prices in future, not past) |
| Cross-checking management claims | Both — see if the story is consistent |
Best practice for beginners: Start with trailing PEG using 3-year average EPS growth. Once you are comfortable reading earnings calls and analyst reports, layer in forward PEG to understand what the market expects next.
For the forward PEG, management guidance is the most direct input — and you don't need to hunt through 30-page transcripts to find it. StockMirror's AI Analyst extracts guidance directly from earnings calls. Ask "what growth guidance did Infosys give this quarter?" and get a grounded answer in seconds — cited to the actual transcript, not a news summary.
Limitations You Must Know
No ratio is perfect.
PE Ratio limitations:
- Ignores growth — a low PE can mean cheap or a declining business
- Affected by accounting choices — earnings can be temporarily inflated
- Meaningless for loss-making companies
- Ignores debt — a heavily indebted company can look cheap on PE while carrying serious risk
PEG Ratio limitations:
- Depends entirely on the accuracy of the growth estimate
- Unreliable for cyclical businesses (steel, cement, commodities)
- Understates value for strong dividend-paying companies
- Negative PEG gives no useful signal
What PE and PEG Still Cannot Tell You
Here is the part most beginner guides skip.
Two stocks. Both PE 28. Both PEG 1.1. On paper, identical.
Company A: Management is confident and direct in their earnings call. Margins are expanding. Revenue growth is fully organic. Analysts asked tough questions and got clear answers.
Company B: Management sounded polished in prepared remarks — but turned evasive when analysts pressed on cost pressures. Growth this quarter included a one-time land sale. Strip that out and earnings actually declined.
Same PE. Same PEG. Completely different risk.
PE and PEG ratios are built on reported earnings — but they cannot tell you whether those earnings are genuine, whether management has conviction about the next quarter, or whether the margins holding up the valuation are about to compress.
Where StockMirror Fits In
At StockMirror.in, when you open any listed company's earnings page, you see AI-powered signals extracted directly from their earnings call transcripts — what management actually said, and how they responded when analysts pushed back.
These signals include:
- Management Confidence — High / Medium / Low
- Earnings Quality — Clean results vs one-time inflated items
- Margin Direction — Expanding or compressing this quarter
- Prepared Remarks vs Q&A Sentiment — When management sounds confident in their script but defensive under analyst questioning, that gap is often the first sign of trouble
- Market Share — Gaining, losing, or holding steady
None of these signals come from financial ratios. They come from what management said in the room — and that context is what tells you whether the PE or PEG you calculated actually means something.
PE and PEG give you the price frame. StockMirror gives you the quality frame behind that price.
Explore any Indian company's earnings signals → stockmirror.in/screener
Summary
- PE ratio = what you pay for ₹1 of earnings. Simple, quick, ignores growth.
- PEG ratio = PE adjusted for growth rate. More complete, especially for growing companies.
- PEG below 1 may indicate undervaluation. Above 1 may indicate overvaluation.
- Neither ratio tells you if the earnings behind the number are real or sustainable.
- Understanding the quality of a company's last quarter — not just the price — is where better investment decisions are made.
Next in the series: The P&L Story — How Revenue Becomes EPS
Frequently Asked Questions
What is the difference between PE ratio and PEG ratio?
PE ratio tells you how much you pay for ₹1 of a company's current earnings. PEG ratio divides the PE by the annual earnings growth rate. A PE of 30 looks expensive — until you know the company is growing earnings at 40% per year. Then the PEG of 0.75 signals undervaluation. PE is a snapshot; PEG adds the growth context.
What is a good PEG ratio for Indian stocks?
A PEG below 1 is generally considered undervalued — you are getting more growth than you are paying for. Around 1 is fairly valued. Above 2 suggests the price has outrun the earnings growth. For high-quality large caps with durable moats, markets often accept PEG up to 1.5.
Which is better — PE or PEG for stock analysis?
PEG is more complete because it accounts for growth. Use PE to compare mature, slow-growth companies in the same sector. Use PEG to compare growth stocks or companies at different stages of their cycle. Neither works for loss-making companies or banks — use EV/EBITDA or P/B ratio instead.
Can the PE ratio be negative?
Yes. A negative PE means the company reported a net loss — there are no positive earnings to divide into the price. A negative PE is meaningless for valuation. For loss-making companies, analysts use revenue multiples, gross margin trajectory, and time-to-profitability instead.
How do you calculate PEG ratio?
PEG Ratio = PE Ratio ÷ Annual EPS Growth Rate. Example: a stock with PE 25 and earnings growing at 20% per year gives PEG = 1.25. Use forward PE (based on expected earnings) and a 3–5 year average growth rate for the most reliable reading.
Disclaimer: This article is for educational purposes only and does not constitute investment advice. Always do your own research before making investment decisions.