The PEG ratio is used to find undervalued growth stocks. It is the P/E ratio (price-to-earnings ratio) divided by the growth rate. Considering a good growth stock grows at a rate equal to its P/E, the PEG Ratio can be used to find companies whose growth has not yet been priced into its stock price i.e. the stock is inexpensive based on the expected rate of growth.
A good PEG ratio is considered to be less than 1. For example, if a stock is priced at $25, EPS is $1, P/E is 25, and the growth rate is 40%, the PEG Ratio is .63.
A stock with a PEG ratio of 1 or greater is growing at the same rate (or less) than its P/E. For example, if a stock is priced at $25, EPS is $1, P/E is 25, and the growth rate is 25%, the PEG ratio is 1.