PEG ratio is a slightly more improved version of the P/E ratio. As you must be aware, the PE ratio is the ratio of the price of the stock to its EPS. It basically tells you how much the market is willing to pay for every rupee earned by the company. Normally, a company with a high growth rate and high return on equity (ROE) will attract a higher P/E ratio. For example, SBI may get a P/E of just 15 but Hindustan Unilever gets a P/E of 45. So, can you say that Hindustan Unilever is overpriced and SBI is underpriced? Not necessarily because this has to be seen with reference to the growth.

A way to combine P/E with growth is the PEG ratio. In the PEG ratio, you divided the P/E by the growth rate of earnings. If Hindustan lever has PE of 45 and is growing at 20% then the PEG ratio is 2.25. On the other hand, if SBI is quoting at a P/E of 15 and is growing at 5%, then the PEG is 3. So, while SBI looks cheaper in P/E terms, it is Hindustan Unilever that is actually cheaper in PEG terms. That is the perspective that PEG gives you as an investor.