PEG Ratio Calculator

Peter Lynch popularized the PEG ratio in his 1989 book One Up On Wall Street as a quick way to compare a stock's P/E ratio against its earnings growth rate. The rule of thumb: a PEG below 1.0 is in the buy zone, a PEG around 1.0 is fair value, and a PEG above 1.0 means you are paying up for growth that may or may not arrive. Lynch ran Fidelity Magellan from 1977 to 1990 and posted a 29% annualized return over 13 years, largely by hunting for growers the market had not yet repriced. The PEG framework was his shorthand for that hunt: if a 25% grower trades at a P/E of 20, the PEG is 0.8 and the stock is interesting; if a 5% grower trades at a P/E of 20, the PEG is 4.0 and you are overpaying for stagnant earnings.

P/E alone is incomplete because two companies with the same multiple can have wildly different growth trajectories, and the market correctly pays more for faster earners. A utility growing earnings at 3% per year and a software firm growing at 30% per year can both trade at a P/E of 20, but they are not comparable investments: the software firm's earnings will double in roughly two and a half years while the utility's barely budge. PEG collapses this into a single number by dividing the P/E by the percent growth rate, so a P/E of 20 on a 30% grower scores 0.67 (cheap for the growth) while the same P/E on a 3% grower scores 6.67 (very expensive for what you get). It is a single-number sanity check on whether the market multiple is justified by the underlying earnings curve.

PEG is most useful precisely where raw P/E breaks down: high-multiple growth names. An Amazon trading at a P/E of 50 looks insane on the P/E screen, but if EPS is growing at 30% per year, the PEG is about 1.67, which is in the overvalued band but not absurd for a category leader with durable growth. A Nvidia at a P/E of 35 with 40% growth scores 0.88, well inside Lynch's buy zone, and historically that combination has worked out. The catch is that PEG is only as good as the growth estimate, and analyst forecasts for hyper-growth names are wide and often wrong. Use a 3 to 5 year forward growth rate where available, and compare PEG against the same name's historical PEG, not against a value-stock benchmark.

PEGY (Price/Earnings to Growth and Yield) adds the dividend yield to the growth rate in the denominator, so the formula becomes P/E divided by (growth percent plus dividend yield percent). It is the right metric for mature dividend payers where a meaningful slice of total return comes from the dividend, not from earnings growth. A utility at P/E 18 with 4% growth and a 4% dividend yield scores a PEG of 4.5 (expensive) but a PEGY of 2.25 (much fairer), because the dividend is contributing to total return that plain PEG ignores. The standard test: if the dividend yield is above roughly 2.5% and the company has a multi-year track record of paying it, use PEGY for the more honest comparison. Use plain PEG for non-payers and growth stocks where the yield is a rounding error.

PEG is only as reliable as the growth rate you feed it, and growth estimates are notoriously wide. Sell-side analyst estimates for the same name often vary by 5 to 10 percentage points, and consensus has missed actual EPS growth by double-digit margins during every major macro turn (2008, 2020, 2022). Beyond estimation error, PEG also hides earnings quality problems: a high-P/E stock with a low-looking PEG can be a company whose earnings are about to deteriorate (one-time gains, channel stuffing, aggressive accruals), in which case the future growth never shows up and the PEG was a mirage. Two practical guards: compare the input growth rate against the company's actual trailing 3 to 5 year EPS CAGR, and never use PEG in isolation. Pair it with free cash flow growth, return on invested capital, and a hard look at earnings quality.