PEG Ratio

The P/E ratio divided by the earnings growth rate, adjusting valuation for growth.

What Is the PEG Ratio?

The PEG ratio adjusts the P/E ratio for growth, giving a more complete picture of whether a stock is fairly valued. It was popularized by legendary investor Peter Lynch.

PEG = P/E Ratio ÷ Annual EPS Growth Rate

Interpreting PEG

• PEG = 1.0: Fair value — the P/E equals the growth rate.
• PEG < 1.0: Potentially undervalued — you're paying less per unit of growth.
• PEG > 1.0: Potentially overvalued — you're paying a premium for growth.

Peter Lynch's Rule

Lynch considered a PEG below 1.0 as a signal that a stock might be undervalued relative to its growth prospects. For example, a stock with a P/E of 20 and earnings growth of 25% has a PEG of 0.8 — potentially attractive. But a P/E of 20 with only 10% growth gives a PEG of 2.0 — expensive.