PEG Ratio Valuation (Lynch): Growth-Adjusted P/E for Investors
PEG ratio explained: what it is, how investors use PEG to value growth stocks, and why growth assumptions can be risky.
What is the PEG ratio?
PEG compares P/E to expected earnings growth. It attempts to adjust valuation for growth—useful when comparing growth stocks, but sensitive to growth assumptions.
How investors use PEG
- Compare growth stocks with similar risk profiles
- Use as a rough cross-check, not a standalone answer
- Validate growth assumptions with business fundamentals
If growth slows, PEG-based valuations can break quickly. Investors should use intrinsic value and margin of safety when possible.
Compare price vs value, not just multiples
Use intrinsic value tools and fundamentals to avoid overpaying for growth.
FAQs
What is a good PEG ratio?▼
Rules of thumb exist (like PEG near 1), but context matters. Growth durability and risk can justify higher or lower PEG values.
Is PEG good for value investing?▼
It's more common in growth investing. Value investors may still use it as a sanity check, but prefer cash-flow-based methods and margin of safety.
Related
Intrinsic Investor is for education and research only. Not financial advice.