What it is
The PEG ratio adjusts a stock's P/E for its earnings growth rate:
PEG = P/E ÷ Earnings Growth Rate (%)
Worked example: a stock at a 24× P/E growing earnings 20% per year has a PEG of 24 / 20 = 1.2. The same 24× P/E on a no-growth business has a PEG of infinity — the growth-adjusted valuation is meaningless because there's no growth in the denominator.
The metric was popularized by Peter Lynch in One Up on Wall Street. His shorthand: a PEG of 1.0 is fair; below 1.0 is potentially cheap; well above 1.0 is overpriced relative to the growth you're underwriting.
What "good" looks like
The Lynch bands hold up reasonably well:
- Under 0.5: Either deep value or a value trap. The earnings growth in the denominator might be reverting from a high base, or about to roll over. Worth investigating, not assuming.
- 0.5–1.0: GARP (growth at a reasonable price) sweet spot. The cleanest bargains in our value bucket tend to live here.
- 1.0–1.5: Fair. The market has priced the growth roughly correctly.
- 1.5–2.0: Expensive. You're paying up for the growth — it had better arrive.
- Above 2.0: Growth premium territory. Justified for category leaders with durable moats; speculation otherwise.
Why it matters
P/E in isolation is misleading because it doesn't know whether you're buying a stagnant utility or a 30%-grower. PEG bridges the gap by encoding the trajectory:
- It lets you compare across growth rates. A 35× P/E on a 30% grower (PEG 1.2) is statistically the same value-quality call as a 14× P/E on a 12% grower (PEG 1.2). Without the growth adjustment you'd default to thinking the lower P/E is cheaper.
- It catches the "story stock" trap. A meme that's running on narrative will have a sky-high P/E and underwhelming revenue/earnings growth — its PEG explodes. The ratio is the simplest discipline against paying $50 today for $1 of growth you've been promised over the next decade.
- It rewards compounders. A business growing earnings 15% per year for 10 years sees its earnings compound 4×. The market often discounts this back to a reasonable P/E ahead of time — and the PEG reads as "fair" the whole way up.
Common gotchas
PEG is the most-abused ratio in retail finance, in large part because no two sources compute it the same way:
- Growth rate ambiguity. Forward EPS growth (5-year analyst consensus)? Trailing earnings growth (year over year)? Revenue growth as a proxy when earnings aren't there? Different sources pick different denominators. We use Yahoo's native PEG (forward-EPS-based) when available, and fall back to a "proxy PEG" computed as
P/E ÷ revenue-growth-%when forward EPS estimates aren't published. The proxy is tagged in the UI so you know which version you're reading. - Cyclical companies. A cyclical at the bottom of its cycle has zero or negative earnings growth. PEG goes to infinity or negative. The ratio simply doesn't apply.
- Acquisition-driven growth. A serial acquirer can show 30% YoY earnings growth that's entirely from M&A, not organic. PEG looks great until the acquisitions stop or unwind.
- Coverage gaps. Forward EPS estimates require sell-side analyst coverage. Names below ~$2B market cap often have one or two analysts covering them — or none. We surface a "n/a PEG" rather than fabricate one. Our model treats this as neutral (not penalizing the name), unlike screeners that mechanically rank such names as worst.
- Banks, insurers, REITs. For sector-structural reasons their PEG often doesn't exist or doesn't mean what it means for industrials/tech. We override the default C-on-null grade to B for these sectors so a structural data gap doesn't drag the score.
How we use it
PEG is one of the five primary grades. The grade bands roughly follow the Lynch shorthand: under 1.0 = A, 1.0–1.5 = B+, 1.5–2.0 = B, 2.0–3.0 = C+, 3+ = C or worse. The "GARP synergy" score adjustment also rewards names that combine a PEG under 1.5, a P/E under 25, and revenue growth above 10% — that intersection is statistically rare and historically the best-performing setup.
Bottom line
PEG is a sharper P/E. It turns "this multiple looks expensive" into "this multiple looks expensive given the growth you're underwriting." Used properly, it's the single best filter for catching paying-up-for-growth mistakes early — and for catching reasonably-priced compounders that look superficially expensive on P/E alone. Just know where the denominator came from, and don't trust any PEG figure you can't audit.