PEG ratio

The PEG ratio is a growth-adjusted multiple that divides forward P/E by the expected earnings growth rate, expressed as an integer percent (so a 20% grower is divided by 20, not 0.20). The shorthand interpretation is that a PEG of 1.0 represents conventional fair value, below 1.0 is undervalued relative to growth, and above 1.0 is expensive. Like every shorthand, it has limits. PEG implicitly assumes earnings growth is the only variable that should command a premium, ignoring quality of earnings, capital intensity, balance-sheet risk, and the duration of the growth runway. A 50% grower trading at PEG 0.8 may still be expensive if the growth comes from one-time pricing actions, while a 10% grower at PEG 1.5 may be cheap if it is a regulated monopoly with a thirty-year visibility horizon. We use PEG as a triangulation lens against forward P/E and the implied growth rate from a reverse DCF: if PEG screams cheap but the reverse DCF says the price already implies the consensus growth rate, then PEG is the lens that is wrong. Conventions vary on whether to use one-, three-, or five-year forward growth — we standardize on three-to-five-year compounded EPS growth from the analyst consensus, which smooths the noise in any single year's estimate and aligns with how multiples normalize through a cycle.