Peg

The PEG ratio is a valuation metric for determining how much more should be paid (in stock price) for a company's expected future growth.
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If a company is growing at 30% a year, then it is OK to pay a P/E of 30. A lower ratio is "better" (cheaper) and a higher ratio is "worse" (expensive). When the PEG is quoted it is not always clear whether the earnings used is the past year's EPS or the expected future year's EPS. It is always the expected future growth rate that is used.

Advantages

Investors may prefer the PEG ratio because it explicitly puts a value on the expected growth in earnings of a company. The PEG ratio can offer a suggestion of whether a company's high P/E ratio reflects an excessively high stock price, or is a reflection of promising growth prospects for the company.

Disadvantages

The PEG ratio is less appropriate for measuring companies without high growth. Large, well-established companies, for instance, may offer dependable dividend income, but little opportunity for growth.

It does not offer much information about a company, saying nothing about the quality of the company's management.

A companies growth is an estimate, it is subject to speculation and deliberate manipulation by the company. Future growth of a company can change due to any number of factors: market conditions, expantion setbacks, and hype of investors.

The convention that (PEG=1) is appropriate is arbitrary. Here is an example of a stock bought and held until the growth has normalized:

Company's growth projection = 30%
Number of year out you expect the growth to continue = 3 years
Historical PE of company = 15
Current earnings of the company = $10/share

Solve for investment return:
Stock price now so that PEG=1 ((P/10)/30=1) = $300/share
Projected earnings after 3 years (PV=10,n=3,30%) = $22/share
Stock price after 3 years (P/E=15=P/22) = $330/share
Your personal investment return (PV=300,n=3,FV=330) = 3.2%

However the figure of return can change depending on variables such as the PE ratio after the growth stage.

Read more at Wikipedia.org