Glossary
PEG Ratio
P/E ratio divided by the expected annual earnings growth rate.
PEG Ratio = P/E Ratio / Annualised EPS Growth Rate. It contextualises a P/E by comparing it to the rate at which earnings are expected to grow, popularised by Peter Lynch in One Up On Wall Street.
A PEG below 1.0 traditionally signals undervaluation relative to growth; above 2.0 hints at overvaluation. Like the underlying P/E, the comparison only works within an industry — a 1.5 PEG can be cheap in software and rich in utilities.
PEG is sensitive to the growth assumption used. Forward PEG (analyst forecasts) and trailing PEG (realised growth) can give very different answers, so always check which version is being quoted.