PEG Ratio
Definition
The P/E ratio divided by the expected earnings growth rate — a valuation metric that accounts for growth.
Explanation
PEG = P/E Ratio / Expected EPS Growth Rate. A PEG of 1.0 means the stock's P/E equals its growth rate — considered fairly valued. Below 1.0 suggests undervaluation relative to growth. Above 2.0 suggests overvaluation. Peter Lynch popularized the PEG ratio as a simple screen for GARP (Growth At a Reasonable Price) investing. Limitations: PEG doesn't account for risk differences between companies, and it relies on growth estimates that may not materialize. Still, PEG is a useful first-pass filter for comparing growth stocks.
Formula
PEG = (P/E Ratio) / Annual EPS Growth Rate