PEG Ratio
P/E ratio normalised by the earnings growth rate — Peter Lynch’s favourite.
Definition
Popularised by Peter Lynch, the PEG ratio divides P/E by the expected earnings growth rate (in percentage points, not decimals). A PEG below 1.0 traditionally signals undervaluation relative to growth, around 1.0 is fairly priced, and above 2.0 is expensive. PEG fixes a flaw in raw P/E — that a 30x multiple may be fine for a 30% grower but disastrous for a 5% grower — but it inherits all of P/E's accounting limitations and depends critically on the growth estimate.
Formula
PEG = (P/E) / (Earnings Growth Rate in %)
e.g. P/E = 25, growth = 20% per year -> PEG = 25 / 20 = 1.25Worked example
NVDA has a forward P/E of 35 and consensus earnings growth of 28% per year. PEG = 35 / 28 = 1.25. Compare with a low-growth utility at P/E 18 and 4% growth: PEG = 4.5 — far more expensive on a growth-adjusted basis.
How ARIA Analyst uses it
ARIA computes PEG using its own forward growth model (a blend of analyst consensus and ML-driven earnings forecasts) and surfaces it when the Bull agent argues "growth at a reasonable price".
Related terms
P/E Ratio
Share price divided by earnings per share — the most popular valuation multiple.
Discounted Cash Flow (DCF)
Intrinsic value of an asset as the present value of its future cash flows.
EV/EBITDA
Enterprise value divided by EBITDA — a capital-structure-neutral cash earnings multiple.
Owners' Earnings (Buffett)
Warren Buffett’s preferred cash-flow measure: net income plus non-cash charges minus maintenance capex.
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