Skip to main content
ValuationPEG

What is the PEG Ratio (PEG)?

The PEG Ratio adjusts the price-to-earnings multiple for expected earnings growth, giving a growth-adjusted valuation metric. Developed by Peter Lynch in his book One Up On Wall Street, PEG below 1.0 is traditionally considered undervalued -- you are paying less than $1 per unit of growth. It bridges the gap between pure value metrics like P/E and pure growth metrics, making it especially useful when comparing companies with different growth profiles.

Formula

PEG = P/E Ratio / Annual EPS Growth Rate

Why Peter Lynch Valued PEG Over P/E

Lynch recognized that a high P/E is not inherently expensive if a company is growing fast enough. A company trading at 30x earnings growing at 30% per year has a PEG of 1.0 -- fair value by Lynch's framework. A company trading at 15x earnings growing at 5% per year has a PEG of 3.0 -- arguably much more expensive on a growth-adjusted basis. PEG makes this comparison explicit.

The ratio is most reliable when applied to growth companies with consistent earnings expansion over 3-5 years, where the growth rate used is a realistic long-term estimate rather than a single-year spike. Using forward PEG (next-year growth estimate) versus trailing PEG (last-year growth) can produce very different readings, so always verify which growth rate is being used before drawing conclusions.

Calculate P/E Ratio

The P/E ratio is the numerator in PEG. Use our free P/E Calculator to compute it from earnings data, then divide by the growth rate to derive PEG.

Open P/E Calculator →

Frequently Asked Questions

What is the PEG ratio and who invented it?+
The PEG (Price/Earnings-to-Growth) ratio was popularized by legendary fund manager Peter Lynch in his 1989 book One Up On Wall Street. It divides the P/E ratio by the annual EPS growth rate to produce a single number that reflects whether the market is paying a fair price for a company's growth. Lynch argued that a PEG of 1.0 represents fair value: you are paying exactly $1 for every percentage point of expected annual earnings growth.
What is a good PEG ratio?+
As a rule of thumb: PEG below 1.0 is potentially undervalued -- you are paying less than $1 per unit of growth. PEG between 1.0 and 2.0 is considered fairly valued. PEG above 2.0 suggests the stock is expensive relative to its growth rate and may be pricing in overly optimistic expectations. These thresholds are guidelines, not hard rules -- a high-quality business with a durable moat may deserve a PEG above 2.0, while a cyclical or capital-intensive business may not deserve a PEG of 1.0.
What are the limitations of the PEG ratio?+
PEG relies on earnings growth estimates, which are notoriously inaccurate -- analyst consensus forecasts miss by an average of 30-40% over a 2-year horizon. The ratio also ignores balance sheet risk: a company with 10x leverage and a PEG of 0.5 is not necessarily cheaper than a debt-free company with a PEG of 1.2. PEG works poorly for value stocks with low or negative growth and for highly cyclical businesses where earnings fluctuate widely. It also does not account for capital expenditure requirements or free cash flow conversion.
What is the difference between PEG and forward P/E?+
Forward P/E uses next-12-months expected earnings in the denominator instead of trailing earnings, making it a forward-looking valuation multiple. PEG takes that forward (or trailing) P/E one step further by dividing by the expected annual earnings growth rate. Both are forward-looking, but PEG is explicitly growth-adjusted: two companies with identical forward P/Es but different growth rates will have very different PEGs, revealing which is cheaper on a growth-adjusted basis.

Related Terms

P/E Ratio

Price divided by earnings per share

Earnings Per Share

Net income allocated per share

Enterprise Value

Total acquisition cost of a company

Return on Equity

Net income relative to shareholders equity

Explore More

Investing Tools

Free Calculators

Learn

← Back to Glossary

Weekly Stock Analysis - Free

5 undervalued stocks, fully modeled. Every Monday. No spam.

Cookie Preferences

We use cookies to analyze site usage and improve your experience. You can accept all, reject all, or customize your preferences.