Negative PEG Ratio is one of those terms that stops most growth investors in their tracks. You’re screening for bargains—sorting columns of PEG numbers that usually hover around 0.8, 1.2, maybe 1.5—and suddenly a ticker flashes -3.7.
Wait, what? Did the spreadsheet glitch, or does this company’s growth story just nosedive into red ink? In reality, a PEG turns negative when either earnings themselves swing to a loss or their growth rate flips below zero. This guide unpacks why the ratio goes south, and how to tell whether the red flag is a false alarm.
Let’s first get to the basics.
The Price-to-Earnings-to-Growth (PEG) ratio adjusts a stock’s P/E for the speed at which the company’s earnings are expected to grow.
PEG = P/E Ratio / Earnings-growth rate (%)
The classic P/E ratio tells you how many dollars investors pay today for each dollar of a company’s trailing or forward earnings. It’s quick, familiar, and blunt. A high P/E can scream “overvalued” even when the company is doubling profits every year, while a low P/E can look like a steal for a business whose earnings are evaporating.
Enter the PEG ratio, which divides that P/E by the company’s expected earnings-growth rate. By anchoring price to how fast profits are expanding, PEG reveals whether a lofty multiple is actually justified, or if a seemingly cheap stock is just a slow-motion melt-down.
For example, a high-flying growth firm on a 40× P/E but 40 % growth sports a PEG of 1.0, while a sleepy utility on a 12× P/E with 2 % growth prints a PEG of 6.0. In other words, PEG adjusts valuation for momentum, making it a more nuanced yardstick, especially when comparing companies across sectors where baseline P/Es differ.
When the PEG ratio ( P/E ÷ EPS-growth ) drops below zero it isn’t the price that’s gone negative—prices are always positive—it’s one (or both) sides of the fraction:
The company is unprofitable – This results in a negative or undefined P/E, which naturally skews the PEG ratio.
The company has positive earnings, but growth is negative – Here, the PEG ratio turns negative because the denominator (earnings growth) is less than zero.
In both cases, the negative PEG ratio doesn't necessarily mean the company is bad—but it does mean investors need to dig deeper. For growth investors especially, a negative PEG can feel contradictory. After all, growth stocks are expected to, well, grow. So how should you interpret this?
It’s crucial to remember that investing is forward-looking, while the PEG ratio is often based on trailing data. A company might have suffered from one-off losses, cyclical downturns, or temporary cost spikes that pulled earnings into the red. In such cases, the PEG ratio may be negative today, but if earnings are expected to rebound, the forward PEG could look far more attractive.
This is why context matters:
If the answers lean positive, a negative PEG could be a temporary optical illusion, a reflection of trailing pain rather than future potential.
A red-ink PEG can look like a death sentence, but history shows it can also mark the inflection point of a comeback. Below are two real-world recoveries that began with negative PEGs.
|
Company / Year |
Why PEG went negative |
What they did |
|
Ad demand collapsed, metaverse cap-ex ballooned, and EPS slid—turning growth below zero while the stock still carried a mid-teens P/E. |
“Year of efficiency” plan: cut 20 %+ headcount, trimmed cap-ex, re-focused AI monetization. |
|
|
Disney (2020 - 2023) |
COVID shut parks and cruise lines; streaming launch costs piled on—swinging EPS deep into the red and growth negative. |
Re-opened parks, pushed price hikes, and pulled streaming to profitability via cost cuts and content consolidation. |
Mathematically, dividing one negative number (the P/E, driven by losses) by another negative number (the expected earnings-growth rate) will indeed spit out a positive PEG ratio. But don’t let the neat arithmetic fool you.
Why the math misleads
A negative P/E tells you the company is losing money.
A negative growth rate tells you those losses are widening or profits are eroding further.
Combining the two doesn’t cancel out the underlying problems; it simply produces a ratio that looks normal even though the fundamentals are deteriorating.
Common culprits
Deep turnarounds (e.g., airlines during a demand collapse).
Companies facing secular decline (think legacy hardware or print media).
Highly cyclical businesses at the absolute bottom of the cycle.
How to handle it
Treat the PEG as “N/A.” Analysts often exclude these cases from screens entirely or label the PEG as “not meaningful.”
Shift to cash-flow or revenue multiples. EV/EBITDA, EV/Sales, or even price-to-book can provide clearer signals when earnings are in negative territory.
Model forward scenarios. Replace the negative trailing numbers with realistic turnaround assumptions—then recalculate PEG only if you can justify a return to positive EPS and growth.
A negative PEG ratio is a bright-red flare, one that tells you something in the earnings engine just misfired, but it’s only a single gauge on the dashboard. Before you hit the accelerator or slam the brakes, cross-check to other valuation metrics & multiples such as EV/EBITDA, free-cash-flow yield for real liquidity, price-to-book for asset support, and debt ratios for survival runway.
Layer in qualitative clues; moat durability, management credibility, and industry cycle and you’ll turn that lone red number into a full, 360-degree valuation view. In other words, let PEG start the conversation; let the rest of your toolkit finish it.
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