What ratio is the price-to-earnings ratio divided by the annual earnings growth rate? PEG ratio is the answer.
PEG stands for price/earnings to growth. Its basic formula divides a company’s P/E ratio by its annual earnings-per-share growth rate, with the growth rate commonly entered as a percentage. For example, a P/E of 30 divided by 30% annual growth gives a PEG of 1.0 under the standard convention.
The metric was developed by Mario Farina in a 1969 investing book and later popularized by Peter Lynch in his 1989 book One Up on Wall Street. Its appeal is that it adds growth expectations to the P/E ratio, which can make a high-P/E growth company look less expensive relative to its expected expansion.
PEG is only a rule-of-thumb, not a complete valuation model. Results depend on whether growth is historical or forecast, whether P/E is trailing or forward, and how sustainable the estimate is. Negative earnings or negative growth can also make the ratio difficult to interpret.