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PEG Ratio

A financial ratio that compares a stock's P/E ratio with the company's expected growth in earnings per share (EPS):

PEG Ratio

Conventional wisdom (and may be argument) has it that choosing a stock with a price earnings/growth ratio (PEG ratio) lower than one (<1) will possibly produce above-average returns. For instance, if a company with a P/E ratio of 35 and a growth rate of 40 percent would be expected to have a PEG ratio of 35/40 = 87.5. Regardless of the resulting figure, it is more appropriate to compare it against a benchmark such as the average PEG ratio by sector. 

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