Valuation Multiples and Growth Analysis
PEG divides a price-to-earnings multiple by an annual EPS growth rate expressed in percentage points: a P/E of 20 and growth of 20% give 20 / 20 = 1. A value of 1 is a screening convention, not a fair-value theorem. The result depends on the EPS definition, price date, forecast horizon, growth risk and reinvestment needed to achieve that growth.
Open financial ratios lookupAssume a hypothetical price of $100 and base annual diluted EPS of $5. P/E is 20. If projected EPS two years later is $7.20, the compound growth rate is (7.20/5)^(1/2) − 1 = 20%, so PEG is 1.00. The $7.20 is an assumption, not a published forecast or promised result.
| Growth assumption | P/E held at 20 | PEG |
|---|---|---|
| 10% annually | 20 / 10 | 2.00 |
| 20% annually | 20 / 20 | 1.00 |
| 25% annually | 20 / 25 | 0.80 |
Specify both the EPS denominator used for P/E and the series used to estimate growth. A trailing P/E can be paired with forecast growth; a provider may call that a forward-looking PEG. Another provider may use next-year EPS for P/E. Neither label alone identifies the calculation.
The conventional comparison assumes positive earnings and positive growth. A zero growth denominator is undefined; near-zero growth can create an extremely large ratio. A negative earnings base makes a conventional growth CAGR and P/E interpretation problematic.
| Hypothetical inputs | Arithmetic result | Interpretation limit |
|---|---|---|
| P/E 20; growth 0% | Undefined | Do not replace division by zero with a valid zero PEG |
| P/E 20; growth −10% | −2 | A negative quotient is not a cheap-growth score |
| P/E −20; growth 10% | −2 | Loss-making earnings invalidate the usual positive-P/E comparison |
| P/E −20; growth −10% | +2 | Two negatives can produce a positive number without restoring meaningful valuation |
Growth affects value through the cash that can eventually be distributed, the investment needed to produce it and the risk of those cash flows. Damodaran shows that risk and payout continue to affect PEG and that dividing by growth does not fully neutralize growth differences. A company can have a lower PEG because its forecast is optimistic or its risks are greater. There is no verified sector benchmark table or universal buy threshold here.
One PEGY convention divides P/E by the sum of EPS growth percentage and dividend yield percentage. A hypothetical P/E of 20, growth of 10% and yield of 2% give 20 / (10 + 2) = 1.6667. This addition does not discount cash flows, prove dividend sustainability or eliminate the need to fund growth. Name the convention explicitly and do not compare PEGY values with ordinary PEG thresholds.
Look up provider-returned PEG and forward-PEG fields for one symbol and the available reporting periods. Check the provider definition and forecast coverage before comparing values; the lookup does not validate growth forecasts or screen all stocks against a custom rule.
The calculations use hypothetical prices and EPS assumptions. PEG is sensitive to forecast definitions and does not establish an expected return or a fair stock price.
