Understanding PEG Ratio

Is growth worth the price?

The PEG Ratio (Price/Earnings-to-Growth) fixes the biggest flaw of the standard P/E ratio: it ignores growth. A company might look "expensive" with a high P/E, but if it's growing rapidly, it might actually be a bargain.

How to Calculate?

PEG Ratio = (P/E Ratio) / Annual EPS Growth Rate

How to Interpret?

• PEG < 1.0 (Undervalued): The market is underestimating the company's growth. This is the "sweet spot" for investors like Peter Lynch.
• PEG = 1.0 (Fair Value): The stock is correctly priced relative to its growth.
• PEG > 1.0 (Overvalued): You might be paying too much for the growth potential, or the market has unrealistic expectations.