PEG (Price/Earnings to Growth)
P/E divided by the earnings growth rate — gauges the multiple once growth speed is taken into account.
In plain terms
Looking at P/E alone, fast-growing companies always show a high multiple (a high P/E is assigned because future earnings are expected to be large).
PEG divides P/E by the company's earnings growth rate to ask "is the multiple high once growth speed is factored in?" For example, even a P/E of 30 gives a PEG of 1 if earnings grow 30% a year. It is a metric Peter Lynch liked to use.
What it tells you
It gauges whether a fast-growing company's high P/E is justified in light of that growth.
P/E alone tends to end at "growth stocks simply carry high multiples," but PEG puts growth in the denominator so you can judge whether that multiple is excessive for the growth.
Formula
PEG = P/E ÷ annual EPS growth rate (%)
What high or low means
Generally, below 1 is seen as low relative to growth, 1 as fair, and above 1 as high relative to growth (Lynch's rule).
But the value changes a lot depending on which growth rate you plug in, so it is hard to treat as an absolute standard.
PEG is very sensitive to the assumed future growth rate. The value swings sharply depending on whether you use past growth or estimated growth.
With zero growth or a loss the calculation is meaningless, and very high growth rates are hard to sustain — so a low PEG does not automatically mean a low price.
"One Up on Wall Street" author Peter Lynch is famous for popularizing PEG. Running the Magellan Fund from 1977 to 1990 he posted an astonishing ~29% average annual return, and when picking growth stocks he liked the rule "if P/E equals the growth rate (PEG = 1), it is fairly priced."
However fast a company grew, if its P/E was far above its growth rate (PEG well over 1) he considered the price steep for the growth. It is a metric that captures the wisdom of weighing growth and price together, guarding against paying a high price while intoxicated by fast growth.
Metrics to read alongside
See it in real stocks
Search US stocks on Stocklore to see PEG and other financial metrics alongside the sector benchmark.
This explanation is for information and reference only and is not a recommendation to buy or sell any security. Investment decisions and their consequences are your own.