PEG Ratio: How to Spot Cheap Growth Stocks on Bursa Malaysia

Many new investors make the same mistake when they look at a fast-growing company. They see the PE (Price-to-Earnings) ratio sitting at 30 or 40 times and immediately conclude "this stock is too expensive". But if that company's earnings are growing 35% a year, the price may actually still be reasonable. This is exactly where the PEG ratio comes in.

The PEG ratio helps you value growth stocks more fairly because it factors in the growth rate, not just the price relative to current earnings. This article explains what the PEG ratio is, how to calculate it, how to read its value, examples for Bursa Malaysia stocks, and the limitations you need to watch out for.

What Is the PEG Ratio? A Quick Answer

The PEG ratio (Price/Earnings-to-Growth) is the PE ratio divided by a company's annual earnings (EPS) growth rate. As a general rule, a PEG below 1.0 suggests a stock may still be cheap relative to its growth potential, a PEG around 1.0 suggests fair value, and a PEG above 1.0 suggests the stock may already be expensive.

In short, the PEG lets you compare a high-PE stock that is growing fast against a low-PE stock that is stagnant on a more level playing field.

The History & Origin of the PEG Ratio

The PEG ratio was popularised by legendary fund manager Peter Lynch in his book "One Up on Wall Street" (1989). Lynch, who managed the Fidelity Magellan Fund, famously argued that the PE ratio of any fairly valued company should equal its growth rate.

The idea is simple but powerful. If a company grows 20% a year, then a PE of 20 times is reasonable (PEG = 1.0). But if its PE is only 10 times while growth is still 20%, it is likely undervalued (PEG = 0.5). According to Investopedia, this is why the PEG is often called a "growth-adjusted" PE.

The PEG Formula & How to Calculate It

The PEG formula is very straightforward:

PEG Ratio = PE Ratio ÷ EPS Growth Rate (%)

To calculate it, follow these three steps:

1. Calculate the PE ratio - divide the current share price by EPS (Earnings Per Share). Example: price RM4.00 ÷ EPS RM0.20 = PE of 20 times.
2. Get the EPS growth rate - use the average annual EPS growth rate, typically a 3 to 5 year forward projection, or the previous year's growth as a guide. Example: EPS growing 25% a year.
3. Divide PE by the growth rate - use the growth number without the percent sign. Example: PE 20 ÷ 25 = PEG 0.8.

In the example above, a PEG of 0.8 signals the stock may still be cheap relative to its growth. Note that the quality of the EPS growth number is central to the accuracy of the PEG - which is why understanding why EPS growth is the most powerful catalyst for share prices is so helpful before you use the PEG.

How to Read the PEG Ratio Value

Here is a quick guide to interpreting the PEG value:

• PEG below 1.0 - The stock is potentially undervalued. The market may not yet fully appreciate the company's growth potential.
• PEG around 1.0 - The stock is fairly valued. The price reflects the expected growth.
• PEG above 1.0 - The stock is potentially overvalued, or the market is already paying a high premium for future growth.

That said, do not be too rigid about the 1.0 mark. A high-quality company with a strong economic moat may deserve to trade at a PEG slightly above 1.0. Conversely, a very low PEG (say 0.3) is sometimes a warning that the market does not believe the growth is sustainable.

Forward PEG vs Trailing PEG: Which Should You Use?

There are two common versions of the PEG ratio, and understanding the difference matters so you do not misinterpret it.

• Trailing PEG - uses the EPS growth rate based on actual past years' performance. The advantage is that it relies on proven data that cannot be manipulated by hope. The drawback is that past performance does not guarantee the future.
• Forward PEG - uses projected future EPS growth, usually analyst consensus estimates. It is more relevant because investing values future potential, but it depends on forecasts that can miss.

Experienced investors often look at both versions together. If both the trailing and forward PEG are below 1.0, that gives more confidence the stock is genuinely cheap relative to its growth. If the forward PEG is far lower than the trailing PEG, ask yourself: is that growth projection realistic, or too optimistic?

Why the PEG Is More Useful Than PE Alone for Growth Stocks

The PE ratio alone does not tell you whether a high PE is justified. Two companies can both have a PE of 30 times, but one grows 5% a year and the other grows 30% a year - clearly their values differ enormously even though the PE is identical.

This is the main weakness of valuing growth stocks on PE alone. If you have just learned how to use the PE ratio to tell whether a stock is cheap or expensive by sector, the PEG is the next step that completes the picture by adding the growth dimension.

Growth stocks such as the technology and semiconductor sectors on Bursa Malaysia often trade at high PE ratios. Without the PEG, investors easily miss opportunities because they fear the large PE number. To understand how growth stocks differ from defensive stocks in a portfolio, read this comparison of defensive vs growth stocks.

PEG Calculation Examples for Bursa Malaysia Stocks

Let us look at three illustrative examples (made-up numbers for learning purposes, not buy recommendations):

Company A - a technology stock:
PE 35 times, EPS growth 40% a year.
PEG = 35 ÷ 40 = 0.875. Even though the PE looks high, a PEG below 1.0 shows this stock may still be cheap relative to its expected rapid growth.

Company B - a mature consumer stock:
PE 15 times, EPS growth 6% a year.
PEG = 15 ÷ 6 = 2.5. Even though the PE looks low and "safe", the high PEG signals you are actually paying dearly for slow growth.

Company C - an industrial stock:
PE 12 times, EPS growth 18% a year.
PEG = 12 ÷ 18 = 0.67. The combination of a low PE with moderate-to-high growth makes this an interesting candidate for further investigation.

Notice how Company B, with the lowest PE, is actually the most expensive when measured by the PEG. This is the real power of the PEG ratio in stopping you from getting trapped by stocks that look cheap but are not growing.

Where to Get the Data to Calculate the PEG Ratio

To calculate the PEG accurately, you need two inputs: the current PE ratio and the EPS growth rate. Here are reliable sources:

• Current price & PE - portals such as Bursa Malaysia, broker platforms, or local stock analysis sites.
• EPS & growth data - quarterly financial reports and company annual reports. If you are not yet confident, refer to this guide on how to read a Bursa Malaysia annual report to learn where to find EPS figures and profit growth.
• Analyst projections - some platforms provide analyst consensus estimates for future EPS growth, which suit the forward PEG.

As a retail investor, official education resources such as InvestSmart by the Securities Commission Malaysia also help you understand the basics of fundamental analysis before you invest.

Limitations & Risks of the PEG Ratio

The PEG ratio is not a magic formula. You need to be aware of its limitations:

• It depends on growth estimates - the forward PEG uses future projections that can miss. If growth does not materialise, a stock that looked cheap can fall hard.
• Not suitable for companies without growth - companies with negative or near-zero growth produce a PEG that is meaningless.
• It ignores other factors - according to Wikipedia, the PEG does not account for return on equity (ROE), debt levels, management quality, or free cash flow. A stock can have a low PEG but be high-risk for other reasons.
• Sensitive to the growth period used - using 1-year vs 5-year growth can give very different PEG values. Be consistent with the period you use.

That is why the PEG is best used as an initial filter, not a final decision.

A Screening Checklist for Cheap Growth Stocks Using the PEG

If you want to use the PEG as a practical screening tool on Bursa Malaysia, follow these simple steps:

1. Screen for stocks with positive & consistent EPS growth - avoid companies whose profits swing wildly or depend on a single large customer.
2. Calculate the PEG and filter for those below 1.0 - this shortlists candidates that may be cheap relative to growth.
3. Check financial stability - look at debt levels, profit margins, and operating cash flow. A low-PEG stock with a weak balance sheet is still risky.
4. Compare with sector peers - a PEG of 0.8 may be normal in one sector but unusual in another.
5. Confirm with qualitative analysis - understand the business model, competitive advantage, and industry outlook before investing.

This disciplined approach helps you narrow hundreds of stocks down to a handful of candidates genuinely worth deeper investigation. Remember, the PEG is just the entry point - the real work is understanding the business behind the number.

Tips for Using the PEG Ratio Effectively

For the best results, combine the PEG with the following approaches:

1. Verify the quality of growth - make sure EPS growth comes from core operations, not one-off gains such as asset sales.
2. Compare within the same sector - the PEG is most meaningful when comparing companies in a similar industry.
3. Use multiple periods - look at the PEG based on both historical and projected growth for a fuller picture.
4. Combine with other metrics - also check ROE, debt ratios, profit margins, and cash flow. A low-PEG stock with strong financials is the ideal combination.
5. Be wary of an unusually low PEG - if a PEG looks too good to be true, investigate why the market does not believe the growth.

Frequently Asked Questions (FAQ) About the PEG Ratio

1. What is a good PEG ratio value?

Generally, a PEG below 1.0 is considered attractive because it signals a stock may be undervalued relative to its growth. However, factor in the quality of the company and its sector.

2. What is the difference between the PEG ratio and the PE ratio?

The PE ratio only compares price to current earnings. The PEG adjusts the PE for the growth rate, so it is fairer for valuing companies that are growing fast.

3. Can the PEG be used for all stocks?

No. The PEG suits growth stocks with positive and stable EPS growth. It is less useful for cyclical companies, loss-making companies, or companies without growth.

4. Should I use last year's growth or future projections?

Ideally future projections (forward PEG), because investing values future potential. But projections risk missing, so many investors also refer to historical growth as a reality check.

5. Where can I find the PEG value for Bursa Malaysia stocks?

Some local and international stock analysis platforms provide the PEG automatically. However, it is safer to calculate it yourself using PE and EPS growth data from official financial reports.

6. Does a PEG below 1.0 mean I must buy?

Not necessarily. A low PEG is only an early signal. You still need to investigate business quality, debt, cash flow, and sector risk before deciding.

7. Why is a high-PE stock sometimes cheaper than a low-PE one?

Because of growth. A PE 35 stock growing 40% (PEG 0.875) is actually cheaper than a PE 15 stock growing 6% (PEG 2.5).

Conclusion

The PEG ratio is a simple but powerful tool to help you spot growth stocks that are still cheap on Bursa Malaysia. By adjusting the PE ratio for the growth rate, the PEG lets you look past a scary-looking PE number and value a stock more fairly. Still, remember that the PEG depends on growth estimates and ignores several important factors, so use it alongside thorough fundamental analysis.

Understanding a ratio like the PEG is one thing, but applying it requires access to the actual market.

To start valuing and investing in your chosen growth stocks, you need a CDS account.

A CDS account lets you invest in Bursa Malaysia as well as overseas stocks such as the United States (US) and Hong Kong markets, through opening a CDS account.

If you are just starting out, first grab the free Stock Market Basics Ebook to understand the fundamentals of investing before going further.

Further Reading

• PE Ratio: How to Tell If a Stock Is Cheap or Expensive by Sector in Malaysia
• Why EPS Growth Is the Most Powerful Catalyst for Share Prices
• Defensive vs Growth Stocks: Why a Smart Portfolio Needs Both
• How to Read a Bursa Malaysia Annual Report Without the Headache
• Finance Dictionary: 50+ Malaysian Stock & Investment Terms