Equity · Core
PEG Ratio
The PEG ratio is P/E divided by expected earnings growth — a back-of-the-envelope adjustment of the multiple for growth.
Definition
PEG = (P/E) / g, with g usually consensus long-term EPS growth in percent. PEG ≈ 1 is folklore for ‘fair.’ It assumes the P/E should scale linearly with growth and ignores payout, risk, and fade.
Why it matters
Growth desks use it to compare expensive compounders. It is a ranking heuristic, not a model. High-quality fade and low-quality hockey sticks look the same.
Case
A software name at 40× growing 40% screens PEG = 1. If growth fades to 15% in year three, the implied multiple was never cheap.
How to read it
Ask whose growth, over what horizon, and what happens when g mean-reverts. Prefer a DCF or an EV/EBIT vs growth scatter.
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