Definition
PEG Ratio
The PEG ratio divides the P/E ratio by the company's earnings growth rate, helping judge whether a high P/E is justified by fast growth.
PEG = P/E / Annual EPS Growth Rate (%). A stock with a P/E of 30 and 30% earnings growth has a PEG of 1, often seen as fairly valued; a PEG below 1 may signal a bargain relative to growth, and above 1 a premium.
Popularised by Peter Lynch, the PEG adds a growth lens to the P/E, which alone can make fast-growing companies look expensive. It is central to the GARP style. The catch: it relies on growth estimates, which can be optimistic, so use conservative, sustainable growth figures.
Related terms
- Growth InvestingGrowth investing focuses on companies expected to grow earnings and revenue much faster than average, even if their valuations look expensive today.
- GARP InvestingGARP (Growth at a Reasonable Price) is a hybrid style that seeks companies with solid growth but avoids overpaying for it.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.