What is PEG Ratio (Price/Earnings-to-Growth) Calculator and How Do You Calculate It?
PEG Ratio = P/E Ratio / Expected Annual EPS Growth RateThis standardized equation forms the quantitative foundation used by chartered financial analysts (CFA), investment bankers, and corporate treasurers under GAAP and IFRS reporting frameworks.
Formula Components & Operational Definitions
P/E RatioCurrent Share Price divided by EPS.
Growth RateProjected percentage growth rate of EPS (e.g. 15 for 15%).
Step-by-Step Real-World Worked Example
Alpha Software trades at 30x P/E with forecasted 25% annual EPS growth over the next 3 years.
Strategic Takeaway: Alpha Software trades at a PEG of 1.20, representing a reasonable valuation for a fast-growing tech firm.
Industry Benchmark Comparison Table
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.
Executive Sector Note: High-quality software companies with high recurring revenues often command PEG ratios of 1.5–2.2.
Analytical Comparison & Critical 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.