Growth-adjusted P/E
PEG
What it is
The PEG divides the P/E by the earnings growth rate. It's a way to see if a high valuation is justified by proportional growth. A PEG of 1 means you're paying the P/E exactly in line with expected growth.
How to read it
One of Peter Lynch's favorite ratios — he considered a PEG below 1 a bargain (P/E cheaper than growth). Above 2, you're probably paying too much for the expected growth. Best for comparing growth companies to each other.
Common reference points
- Undervalued for the growth< 1
- Fairly valued1 – 2
- Expensive for the growth> 2
Orders of magnitude, not a rule: the same number does not mean the same thing from one sector to the next.
What it does not tell you
The PEG depends on the growth rate — if growth decelerates, the ratio becomes misleading. Useless for mature low-growth companies or cyclicals with volatile earnings.
Other measures — Valuation
Educational content. Polaris is not a registered investment adviser and makes no recommendation.