Calculate the PEG ratio from the P/E multiple and expected earnings growth rate to evaluate whether a stock's valuation is justified by its growth prospects.
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Equity Valuation
The PEG ratio divides the P/E multiple by the expected earnings growth rate, adjusting valuation for growth. A PEG near 1.0 suggests the stock is fairly valued relative to its growth prospects.
A high P/E ratio may be justified if the company is growing rapidly. PEG normalises the P/E by dividing it by the growth rate, making it easier to compare fast-growing and slow-growing companies on a like-for-like basis.
Peter Lynch popularised the PEG ratio, suggesting that a PEG of 1.0 represents fair value — the P/E equals the growth rate. Below 1.0 suggests undervaluation; above 1.0 suggests overvaluation.
Divide P/E by expected earnings growth.
PEG = P/E Ratio / Expected Earnings Growth Rate (%)
Use forward (expected) earnings growth, not historical. Growth rate is in percentage terms (e.g. 15 for 15%).
A stock with P/E of 20 and expected 15% earnings growth. PEG = 20 / 15 = 1.33. Slightly above fair value by Lynch's rule of thumb.
Relies on growth estimates which are uncertain. Does not work for companies with negative earnings or negative growth. Ignores risk, capital intensity, and payout differences.
Frequently asked questions
Below 1.0 may indicate undervaluation. Around 1.0 is considered fair. Above 1.5–2.0 may suggest overvaluation. But context matters — high-quality companies often command PEG premiums.
Forward (expected) growth is preferred because it reflects future prospects. Trailing growth is backward-looking and may not represent the company's current trajectory.
If either P/E or growth is negative, PEG is not meaningful. Use PEG only for profitable, growing companies.
PEG adjusts for growth, making it better for comparing companies with different growth rates. P/E is simpler but can mislead when comparing fast and slow growers.
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