PEG Ratio

The P/E ratio divided by the expected earnings growth rate. It asks whether the multiple is large relative to growth.

Formula

P/E / annual EPS growth rate, with growth written as a whole number. A P/E of 20 and 20% growth is a PEG of 1.

What it means

Peter Lynch popularised PEG as a way to stop comparing a fast grower with a slow one on P/E alone. A PEG near 1 was his rough line for a fully priced growth stock. It is a screen, not a valuation model.

Growth in the denominator is usually expected EPS growth over several years. A trailing growth rate answers a different question.

How to read it

A PEG well below 1 can mean the market is paying little for the growth on offer. A PEG well above 1 can mean the multiple already assumes a long runway. Both readings fail if the growth rate is unstable or the P/E uses distorted earnings.

What to watch

Do not use PEG when earnings are negative, tiny, or about to change sign. A 100% growth rate off a very small base produces a flattering PEG. Very high growth is rarely sustained, so a low PEG built on a 40% forecast needs extra doubt.

This note explains the term. It is not a research recommendation, a target price, or a comment on any security. Ratios and regulatory thresholds change; use the latest filing or circular for a live figure.