A technology company trades at a Price-to-Earnings (P/E) multiple of 30.0x. If the company's earnings per share (EPS) are projected to grow at an annual rate of 20.0% p.a., what is the PEG Ratio of the stock, and how is it interpreted?

[ A ]PEG Ratio = 1.50 [ P/E divided by EPS Growth Rate: 30 / 20; indicates stock is trading at a premium to its growth rate ][ CORRECT ]

[ B ]PEG Ratio = 6.00 (Multiplying P/E by growth rate)

[ C ]PEG Ratio = 0.67 (Inverting the ratio: 20 / 30)

[ D ]PEG Ratio = 1.00

Takeaway

Option A is correct: PEG Ratio = 1.50 [ P/E divided by EPS Growth Rate: 30 / 20; indicates stock is trading at a premium to its growth rate ]

Derivation

PEG extends the standard P/E multiple by normalizing it against the growth rate that's supposedly justifying that multiple, so two stocks trading at the same P/E can look very different once growth is factored in. PEG Ratio = P/E / EPS Growth Rate = 30.0 / 20.0 = 1.50. The interpretation benchmark treats PEG below 1.0 as a signal the stock may be undervalued relative to its growth, PEG at 1.0 as roughly fair value, and PEG above 1.0 as a premium valuation the growth rate alone doesn't fully justify. At 1.50 here, the stock's 30x earnings multiple is running ahead of its 20% growth rate, meaning the market is pricing in either further growth acceleration or simply a growth premium beyond what current numbers support.

Why the others fail

B — PEG Ratio = 6.00 (Multiplying P/E by growth rate)

Multiplies P/E by the growth rate instead of dividing, producing a figure with no meaningful interpretation under the standard PEG benchmark scale.

C — PEG Ratio = 0.67 (Inverting the ratio: 20 / 30)

Inverts the ratio, dividing growth rate by P/E instead of P/E by growth rate, which reverses the direction the PEG benchmark is meant to be read in.

D — PEG Ratio = 1.00

Assumes a coincidental parity value of exactly 1.00 rather than performing the actual division of the 30x P/E multiple by the 20% growth rate.