The PEG Ratio
P/E adjusted for growth — why a high P/E can still be cheap.
PEG = P/E ÷ annual earnings growth rate (%)
A P/E of 30 growing 30%/yr has a PEG of 1; the same P/E growing 10% has a PEG of 3.
PEGThe P/E ratio adjusted for earnings growth. addresses P/E’s big flaw — it doesn’t account for growth. By dividing P/E by the growth rate, PEGThe P/E ratio adjusted for earnings growth. lets you compare a fast-grower and a slow-grower fairly. A rough rule of thumb: PEG around 1 is reasonable, well below 1 may be cheap, well above 1 may be pricey.
PEGThe P/E ratio adjusted for earnings growth. is why a “scary” 40 P/E can actually be cheaper than a “safe” 15 P/E: if the 40-P/E firm grows 40% (PEGThe P/E ratio adjusted for earnings growth. 1) and the 15-P/E firm grows 5% (PEG 3), the expensive-looking one is the better value. Growth changes everything about what a multiple means.
Common mistakeTrusting PEGThe P/E ratio adjusted for earnings growth. blindly — it relies on a growth forecast, and high growth rarely lasts as long as assumed. A low PEGThe P/E ratio adjusted for earnings growth. built on heroic, unsustainable growth estimates is an illusion.
Key takeawayPEGThe P/E ratio adjusted for earnings growth. = P/E ÷ growth; it fairly compares fast and slow growers. ~1 is reasonable, but it’s only as good as the growth estimate behind it.
FAQs
Is a low PEG always a buy?
No — PEG depends entirely on the growth assumption, which is uncertain and often too optimistic. A low PEG is a useful flag to investigate, not a verdict. Sanity-check whether the assumed growth is genuinely durable.