Glossary · Valuation · Beginner-friendly
PEG ratio
In plain English
PEG compares a stock’s P/E to its expected growth. It asks: “Am I paying a high price tag because growth might justify it?”
Everyday analogy: Paying more for a bakery that is growing fast - but only if the growth forecast is real.
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Why it matters
PEG tries to answer whether a rich P/E is “paid for” by growth - useful as a peer screen, dangerous as gospel.
A bit more detail (optional)
The idea
PEG ≈ P/E ÷ expected EPS growth rate. A PEG near 1 is often cited as “fair,” but the rule of thumb breaks when growth estimates are fantasy or cyclical.
Limits
PEG inherits every P/E flaw, then adds forecast risk. Two analysts can produce very different PEGs for the same stock.
Simple examples
Expensive that looks fair
A stock at 30× earnings with 30% expected growth has PEG 1 - but if growth slips to 15%, the story and the multiple both re-rate.
Growth slip
PEG looks fair at 1.0 on 25% expected growth. Guidance cuts growth to 12% - the multiple was priced for a path that vanished.
Easy mistakes to avoid
- Trusting a single analyst’s growth rate
- Using PEG on cyclical peak earnings
- Ignoring that negative or tiny growth breaks the math
Remember: PEG is a growth-adjusted starting point - never a buy button.