Investing term
What is PEG ratio?
P/E ÷ expected earnings growth rate. A way to ask 'how much am I paying per point of growth?'
The PEG ratio divides a stock's P/E by its expected earnings growth rate, putting valuation in the context of growth. A stock with a 30× P/E growing earnings at 30% a year has a PEG of 1.0; the same 30× P/E on a company growing 10% has a PEG of 3.0. It tries to answer whether a high P/E is justified by fast growth.
The idea is intuitive: a high multiple can be reasonable if growth is fast enough, and expensive if it isn't. A PEG around 1 is often treated as roughly fair value, below 1 as potentially cheap for the growth, and well above 1 as pricey. It's a useful quick screen and a natural fit for the GARP style. But it depends entirely on a forecast growth rate, which is uncertain and often too optimistic, and it treats all growth as equally valuable regardless of quality or durability. So PEG is a helpful rule of thumb, not a precise valuation — best used to flag stocks for a closer look rather than as a final verdict.
The PEG ratio is P/E ÷ growth rate — a high P/E can be reasonable if growth is fast enough. A PEG near 1 is often seen as fair, but it hinges on an uncertain forecast growth rate.
For example
A stock at a 30× P/E growing earnings 30% a year has a PEG of 1.0 — the rich multiple arguably justified by the fast growth — while a 30× P/E on 10% growth gives a PEG of 3.0, expensive for the growth.
Learn it by doing
That's PEG ratio in theory — it clicks when you use it. Practise it hands-on in a free, interactive lesson (Stage 15, Valuation for Investors).
Try the free lesson →Why it matters to you
The PEG ratio matters because it addresses a real weakness of the P/E ratio: a high P/E isn't necessarily expensive if growth is fast. By relating price to growth, PEG offers a fuller sense of whether you're overpaying, and it captures the GARP discipline of not paying up for growth beyond what it's worth. Its limits — reliance on uncertain forecasts and blindness to growth quality — mean it's a screening tool, but a genuinely useful one for judging whether a growth multiple is reasonable.
⚠ Trusting the forecast growth rate
PEG hinges on an expected growth rate, which is a forecast — often optimistic and prone to being cut. A low PEG only signals a bargain if that growth actually materialises, and analysts' growth estimates frequently overshoot. Relying on a low PEG without questioning whether the growth is realistic and durable can make an expensive stock look cheap. Treat the growth input with healthy skepticism.