PEG Ratio Calculator
The PEG Ratio (Price/Earnings-to-Growth) adjusts the traditional P/E ratio by dividing it by the expected annual earnings growth rate. Popularized by legendary investor Peter Lynch, it determines whether a stock’s valuation multiple is justified by its growth rate.
Sensitivity Analysis
Evaluate how variations in key operational drivers impact PEG Ratio.
| Sensitivity Case | Assumption Shift | Driver Value | PEG Ratio | Impact vs Base |
|---|
Formula & Methodology
PEG Ratio = P/E Ratio / Expected Annual EPS Growth RateP/E RatioCurrent Share Price divided by EPS.
Growth RateProjected percentage growth rate of EPS (e.g. 15 for 15%).
Practical Worked Example
Alpha Software trades at 30x P/E with forecasted 25% annual EPS growth over the next 3 years.
Interpretation & Industry Benchmarks
Peter Lynch popularized PEG: PEG = 1.0 is fair value; PEG < 1.0 is attractive; PEG > 2.0 is expensive.
Growth At a Reasonable Price sweet spot.
Healthy balance between price and growth.
Modest premium over growth rate.
High multiple not justified by growth.
Industry Nuance: High-quality software companies with high recurring revenues often command PEG ratios of 1.5–2.2.
Analytical Limitations
- Heavily dependent on analyst growth forecasts which are frequently revised.
Frequently Asked Questions
What is Peter Lynch’s rule for PEG ratio?
Peter Lynch believed a fairly valued company has a P/E ratio equal to its growth rate (PEG = 1.0). A PEG below 1.0 suggests a bargain.