How to find JSE value stocks with PEG and PEGY Ratios

Value investors are always looking for shares trading for less than they're really worth. The price-to-earnings (P/E) ratio is the classic starting point, but on its own it can be misleading because it ignores growth. That's where the PEG and PEGY ratios come in. This guide explains how to use them to hunt for potentially undervalued JSE shares — and the limits you need to keep in mind.

A quick recap of the P/E ratio

The price-to-earnings (P/E) ratio compares a company's share price to its earnings per share. A high P/E can mean a share is expensive — or that investors expect strong growth. A low P/E can mean a bargain — or a struggling business. Because the P/E says nothing about growth, two companies with the same P/E can be very differently valued once growth is taken into account.

The PEG ratio: adding growth to the picture

The PEG ratio fixes that blind spot. It divides the P/E ratio by the company's expected earnings growth rate:

PEG = P/E ÷ earnings growth rate

As a rough rule of thumb, a PEG below 1 may suggest a share is undervalued relative to its growth, while a PEG above 1 may suggest it's expensive. By factoring in growth, the PEG lets you compare a fast-growing company and a slow one on fairer terms than the P/E alone.

The PEGY ratio: for dividend payers

Many JSE shares are valued partly for their dividends, and the PEG ignores that income. The PEGY ratio adjusts for it by adding the dividend yield to the growth rate:

PEGY = P/E ÷ (earnings growth rate + dividend yield)

For income-paying shares, PEGY can give a fairer reading than PEG, because it rewards companies that return cash to shareholders as well as those that grow. A lower PEGY, like a lower PEG, may point to better value.

How to use them to screen JSE shares

You can use these ratios as a filter: look for shares with low PEG or PEGY values as candidates worth investigating further. The earnings, growth estimates and dividend data you need are published in company results and on financial data platforms. Treat the numbers as a starting point for research, not a buy signal on their own.

A worked example

Say a share trades on a P/E of 15. On its own, that figure tells you little — is it cheap or expensive? Now add growth. If the company's earnings are expected to grow at 15% a year, its PEG is 15 ÷ 15 = 1.0, which is around fair value on the rule of thumb. If a similar share also on a P/E of 15 is only expected to grow at 7.5%, its PEG is 15 ÷ 7.5 = 2.0 — meaning you're paying twice as much for each unit of growth. Same P/E, very different value once growth is included. If the first company also pays a healthy dividend, its PEGY would look even more attractive than its PEG, because the income is added to the growth in the denominator. This is exactly why seasoned value investors look past the headline P/E.

The limitations to remember

• Growth is an estimate. PEG and PEGY rely on forecast growth, which may not materialise.
• They're not standalone tools. Use them alongside other measures and a look at the business itself.
• Sectors differ. What counts as a "cheap" ratio varies between industries.
• Quality matters. A low ratio can flag a value trap — a cheap share that's cheap for good reason.

Used carefully, these ratios are a useful screen, but they work best as part of a broader approach. See our guide to investment strategies for beginners for the wider context, our dividend investing guide for income ideas, and consider professional advice for bigger decisions.

Key takeaways

• The P/E ratio alone ignores growth, which can make it misleading.
• PEG divides the P/E by the earnings growth rate to account for growth.
• A PEG below 1 may suggest undervaluation; above 1 may suggest it's expensive.
• PEGY also adds the dividend yield, which suits income-paying shares.
• Both rely on growth estimates, so treat them as a screen, not a buy signal.
• Combine them with other analysis and a look at the underlying business.

Frequently asked questions

What is a good PEG ratio?

As a rough guide, a PEG below 1 may indicate a share is undervalued relative to its growth, though it should never be used in isolation.

What's the difference between PEG and PEGY?

PEG factors in earnings growth; PEGY also adds the dividend yield, which makes it more useful for income-paying shares.

Are these ratios reliable?

They're helpful screens, but they depend on growth estimates and ignore other factors, so combine them with broader analysis.

This article is general information for South African investors and not financial advice. Share investing carries risk — do your own research and consider professional advice before investing.