PEG (Price/Earnings to Growth)
PER divided by the earnings growth rate — gauges whether a stock is expensive once its growth speed is taken into account.
In plain terms
Looking at PER alone, fast-growing companies always look expensive (a high PER is assigned because future earnings are expected to be large).
PEG divides PER by the company's earnings growth rate to ask "is it expensive once growth speed is factored in?" For example, even a PER 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 PER is justified in light of that growth.
PER alone tends to end at "growth stocks are simply expensive," but PEG puts growth in the denominator so you can judge whether that expensiveness is excessive.
Formula
PEG = PER ÷ annual EPS growth rate (%)
What high or low means
Generally, below 1 is seen as undervalued relative to growth, 1 as fair, and above 1 as expensive 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 is not automatically cheap.
"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 PER equals the growth rate (PEG = 1), it is fairly priced."
However fast a company grew, if its PER was far above its growth rate (PEG well over 1) he considered it expensive. 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 average.
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.