Metric Explainer: PEG Ratio
PE ratio adjusted for growth. A PEG of 1 means the PE equals the earnings growth rate — considered "fair value" by growth investors. "PEG batata hai ki PE ki...
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Simple definition
PE ratio adjusted for growth. A PEG of 1 means the PE equals the earnings growth rate — considered "fair value" by growth investors.
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"PEG batata hai ki PE kitna justified hai growth ke muqable mein. PEG 1 = PE aur growth barabar = sahi price. PEG < 1 = sasta, PEG > 2 = mehenga."
Why it matters
- Solves the PE limitation — PE alone can't tell if a high PE is justified by high growth
- Growth-adjusted valuation — normalises PE across different growth rates
- Peter Lynch's favourite — the legendary fund manager popularised PEG < 1 as a buying signal
- Quick growth-value screen — identify growth at reasonable price (GARP) stocks
Formula
PEG = PE Ratio / EPS Growth Rate (%)
Example: PE = 30, EPS Growth = 25% → PEG = 30/25 = 1.2
How to interpret
| PEG | Interpretation |
|---|---|
| < 0.5 | Very cheap relative to growth — investigate why |
| 0.5–1.0 | Attractive — growth at a reasonable price |
| 1.0–1.5 | Fairly valued |
| 1.5–2.0 | Moderately expensive |
| > 2.0 | Expensive — PE not justified by growth |
Which growth rate to use?
| Growth type | Pros | Cons |
|---|---|---|
| Historical 3-year CAGR | Based on actual data | Past may not predict future |
| Historical 5-year CAGR | Smoother, less base-effect | Too backward-looking |
| Forward (consensus estimate) | Forward-looking | Analyst estimates may be wrong |
| Recommended | Use 3-year historical + sanity check with forward estimates |
Common mistakes
Mistakes to avoid
- Negative EPS growth — PEG becomes meaningless (negative). Only use for growing companies
- Very low growth — PEG = 30 / 3 = 10 — mathematically meaningless, not a growth stock
- Cyclical companies — EPS growth swings wildly; PEG will mislead
- Base-year choice — Different base years give dramatically different growth rates and PEGs
- Not the only metric — Low PEG with poor ROCE or high debt can still be a bad investment
Real example
| Company | PE | EPS CAGR (3Y) | PEG | Assessment |
|---|---|---|---|---|
| Dixon Technologies | 85 | 45% | 1.9 | High PE but strong growth — moderate |
| HDFC Bank | 20 | 18% | 1.1 | Fair — growth justifies PE |
| HUL | 55 | 8% | 6.9 | Very expensive for growth delivered |
| Bajaj Finance | 30 | 25% | 1.2 | Reasonable growth-value balance |
HUL trades at PE 55 but grows EPS at only 8%. PEG of 6.9 shows the growth doesn't justify the multiple. Bajaj Finance at PE 30 with 25% growth is much better PEG value.
Red flags
- PEG > 3 — PE is excessive for the growth delivered
- PEG calculated using one-time spike year as growth — normalise first
- Low PEG with declining ROCE — growth may be destroying value
- Analysts projecting unrealistic forward growth to make PEG look low
Related metrics
- PE Ratio — Numerator of PEG
- EPS Growth — Denominator of PEG
- ROCE — Quality check: is growth creating value?