- 1PEG = P/E Ratio ÷ Expected EPS Growth Rate
- 2PEG of 1.0 means the stock is fairly valued for its growth
- 3Below 1.0 suggests undervaluation; above 2.0 suggests overvaluation
- 4Made famous by Peter Lynch in "One Up on Wall Street"
- 5Works best for moderate-growth companies; breaks down for low/negative growth
#What Is the PEG Ratio?
The PEG ratio adjusts the P/E ratio for growth. A stock with a P/E of 30 might seem expensive, but if earnings are growing 30% per year, PEG = 1.0 — which is "fairly priced" for its growth.
PEG Ratio = P/E Ratio ÷ Annual EPS Growth Rate (%)
Example: P/E of 25, EPS growth of 20% → PEG = 25 ÷ 20 = 1.25
#Peter Lynch's Rule
Peter Lynch popularized the PEG ratio, arguing:
- PEG < 1.0: Potentially undervalued — the stock is cheap relative to growth
- PEG = 1.0: Fairly priced — paying a reasonable price for growth
- PEG > 2.0: Potentially overvalued — paying too much for growth
#Which Growth Rate to Use?
This is where PEG gets tricky:
| Growth Rate | Source | Pros | Cons |
|---|---|---|---|
| Historical (trailing) | Past 3–5 year EPS growth | Verifiable, concrete | Past ≠ future |
| Forward (estimated) | Analyst consensus | Forward-looking | Estimates are often wrong |
| Long-term (5-year) | Analyst projections | Smooths cyclicality | Very speculative |
Our recommendation: Use forward estimates for the next 1–2 years. They're less speculative than 5-year projections but more relevant than historical rates.
#When PEG Works vs. When It Breaks
Works well for: - Companies growing 10–30% per year - Comparing two growth stocks head-to-head - Quick screening for reasonably priced growth
Breaks down for: - **Negative growth** — PEG becomes negative (meaningless) - **Very slow growth (<5%)** — PEG inflates to huge numbers - **Cyclical companies** — Growth rates are erratic - **Early-stage companies** — No stable earnings to measure
#PEG vs. Other Valuation Metrics
| Metric | What It Measures | Blind Spot |
|---|---|---|
| P/E | Price vs. current earnings | Ignores growth |
| PEG | Price vs. growth-adjusted earnings | Ignores margins, capital needs |
| EV/EBITDA | Enterprise value vs. operating profit | Ignores growth |
| P/FCF | Price vs. cash generation | Ignores growth trajectory |
PEG adds growth context that P/E lacks, but it still doesn't account for margins, capital allocation, or competitive position.
#How We Use Growth-Adjusted Metrics
In our ranking model, we capture growth through the Growth factor, which includes revenue growth and asset growth rates. Combined with our Value and Profitability factors, this gives a more complete picture than PEG alone.
Last updated: February 5, 2026