Calculate the price you are paying for every unit of future growth.
Peter Lynch standard is 1.0
PEG accounts for growth. A P/E of 40 might be "cheaper" than a P/E of 20 if the first company is growing at 50% while the second is growing at 5%.
Slightly Overvalued
Growth-Adjusted Fair P/E
15.0x
Based on 1 PEG
Growth Premium
+66.7%
Above Fair P/E
Peter Lynch's Rule
"The P/E ratio of any company that's fairly priced will equal its growth rate." This is why tech stocks often have high P/E ratios but low PEG ratios.
The Price/Earnings-to-Growth (PEG) ratio is a stock-valuation measure that determines the relative value of a stock while also factoring in its expected earnings growth. While a standard P/E ratio only looks at current earnings, the PEG ratio looks at the "Future" value of those earnings.
Famous investor Peter Lynch popularized the idea that a "fairly valued" company should have a PEG of 1.0. This means its P/E ratio is exactly equal to its growth rate (e.g., a 20x P/E for a 20% growth rate).
Most investors use **Forward PEG**, which uses projected growth for the next 3 to 5 years. While more useful for valuation, it relies on analysts' estimates which can be inaccurate. Trailing PEG uses historical growth, which is more factual but less predictive of future stock performance.
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