PEG Ratio — What It Is and How It Fixes P/E
The PEG ratio is the P/E ratio divided by the expected earnings growth rate (as a percentage) — it tries to answer the question plain P/E ignores: is the multiple high because the stock is expensive, or simply because it's growing fast?
The calculation: PEG = P/E divided by the expected annual earnings growth rate (as a number, without the percent sign). A company with a P/E of 30 growing 30% a year gets a PEG of 1, while a company with the same P/E of 30 growing only 10% a year gets a PEG of 3 — meaningfully more expensive relative to its growth, even though the raw multiple is identical.
The traditional rule of thumb (attributed to investor Peter Lynch) is that a PEG around 1 is considered fairly priced relative to growth, below 1 suggests a possible opportunity, and above 2 suggests expensive pricing relative to growth. But this is a rough heuristic, not a precise formula — it depends entirely on the quality of the growth forecast fed into it, which is itself an estimate, not a fact.
PEG is especially useful for comparing two companies in the same sector with different P/E multiples but also different growth rates — it prevents the hasty conclusion that 'a high multiple = expensive' without accounting for the growth that justifies it.
How StockIQ AI uses this
StockIQ doesn't compute PEG as a single blended ratio — but it effectively does something similar indirectly, by scoring the growth category (15% of the score) and the fair value category (15% of the score) as two separate categories rather than folding them into one combined multiple.
Frequently asked questions
What is considered a good PEG ratio?
A traditional rule of thumb (attributed to investor Peter Lynch) holds that a PEG around 1 is fairly priced relative to growth, below 1 suggests a possible opportunity, and above 2 suggests expensive pricing — but this is only a rough heuristic, not a precise formula, and it depends on the quality of the growth forecast fed into it.
What's the difference between P/E and PEG?
P/E compares price to current earnings alone, without accounting for growth rate. PEG divides that same multiple by the expected growth rate, so it can distinguish between two companies with the exact same P/E but very different growth rates — one may be cheap relative to its growth, the other expensive.
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The information on this page is intended for general educational purposes only and does not constitute investment advice. Full details on the disclaimer page.