PEG Ratio
ValuationP/E divided by earnings growth rate — a smarter valuation check that asks whether the price you're paying is actually justified by how fast the company is growing.
The Price/Earnings-to-Growth ratio, developed by Peter Lynch, adjusts the P/E ratio for expected earnings growth to produce a growth-normalised valuation metric. A PEG of 1.0 implies the market is paying exactly in line with the growth rate — considered fair value by Lynch's framework. PEG below 1.0 suggests potential undervaluation relative to growth; above 2.0 suggests the market is pricing in growth that may not materialise. PEG resolves the core limitation of the P/E ratio: a P/E of 30× looks expensive in isolation but is actually cheap if the company is growing earnings at 40% annually. It is most applicable to profitable, growing companies and loses validity for cyclicals, financials, or businesses with erratic earnings.
P/E Ratio is share price divided by earnings per share. Annual EPS Growth Rate is the expected or historical earnings growth percentage — typically the next 3–5 year CAGR. Divide them: a company with P/E of 25 and 25% growth has a PEG of 1.0.
Growth exceeds what the valuation implies. Potentially undervalued relative to growth — the framework Peter Lynch built his career on. Always verify the growth estimate is credible.
Market is paying roughly in line with growth expectations. Neither a screaming buy nor obviously expensive. Quality of the business and earnings visibility matter most here.
Significant premium to growth. Market is pricing in either accelerating future growth or a quality premium. High execution risk — any growth disappointment tends to result in severe multiple compression.
PEG solves the most common mistake in P/E analysis: assuming high P/E always means overvalued. A 40× P/E on a 50%-growth compounder is a better deal than a 12× P/E on a -2% earnings-decline business. PEG provides a common framework for comparing fast-growing companies with different absolute P/E levels. Peter Lynch used it as his primary screen for identifying GARP (Growth at a Reasonable Price) investments.
PEG is only as accurate as the growth estimate used. Analysts routinely overestimate long-run earnings growth — the average 5-year consensus estimate has historically been too optimistic by a wide margin. A PEG of 0.8 built on a wildly aggressive 40% growth assumption may actually be more expensive than a PEG of 1.5 built on a conservative, high-confidence 15% estimate. Always stress-test the growth rate before trusting the PEG output.