PEG Ratio

intermediate

7 min read

Updated 2026-07-13

Reviewed by SST Editorial

The PEG (Price/Earnings-to-Growth) ratio is a valuation metric that adjusts the P/E ratio by incorporating the company's expected earnings growth rate. It is calculated by dividing the P/E ratio by the annual EPS growth rate (as a whole number). A PEG ratio of 1.0 is traditionally considered to represent fair value; a PEG below 1.0 suggests a stock is undervalued relative to its growth, while a PEG above 1.0 suggests it is overvalued.

Key Takeaways

01.Calculated as P/E Ratio / Annual EPS Growth Rate.
02.Popularized by legendary investor Peter Lynch to evaluate high-growth companies.
03.A PEG < 1.0 suggests a company is undervalued relative to its earnings growth.
04.Enables fair comparison between a high-growth, high P/E stock and a low-growth, low P/E stock.

Why it matters

A standard P/E ratio penalizes fast-growing companies because they look expensive. The PEG ratio solves this by adjusting for growth: a company with a P/E of 30 growing at 30% (PEG = 1.0) is valued similarly to a company with a P/E of 10 growing at 10% (PEG = 1.0), showing they are equally priced relative to growth.

When it matters

It is best applied to mid- and large-cap growth companies with stable, positive growth rates.

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Visual Reference: table

Comparing P/E vs PEG ratios across three software stocks to find the best growth value.

Interactive Tool: widget

Input a stock's P/E and growth rate to calculate its PEG and see the valuation assessment.

Common Mistakes

Using inconsistent growth rates

PEG calculations can use historical growth (trailing PEG) or projected growth (forward PEG). Comparing the trailing PEG of one stock to the forward PEG of another is a common error that leads to false conclusions.

📖 Real-World Example: Peter Lynch's selection model

In the 1980s, a fast-food chain grew its earnings at 25% per year. While its P/E ratio of 20 seemed high compared to the index average of 12, its PEG ratio was only 0.8 (20 / 25). Investors who bought based on this PEG multiple enjoyed substantial gains as the business continued to compound.

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