PEG ratio
ValuationDefinition
A valuation shortcut: take the P/E ratio and divide it by the company's earnings growth rate. The idea is to adjust P/E for how fast the company is growing. A PEG below 1.0 suggests a stock looks cheap given its growth. Above 1.0, it looks expensive. This is most useful for profitable companies with predictable growth.
Peter Lynch popularized PEG in his book One Up on Wall Street. Watch out: small changes in the growth estimate swing the ratio a lot, so do not rely on it alone.
Peter Lynch popularized PEG in his book One Up on Wall Street. Watch out: small changes in the growth estimate swing the ratio a lot, so do not rely on it alone.
Formula
PEG = P/E ratio divided by expected annual earnings growth rate (as a number, not decimal)
Example
Stock A trades at a P/E of 30 and is growing earnings at 25% per year. PEG = 30 / 25 = 1.2, which is slightly expensive. Stock B has a P/E of 20 and is growing 30%, so PEG = 0.67, which screens as a bargain.