In 30 seconds
- The PEG divides the P/E by the annual growth rate of earnings per share: how many times over you're paying for that growth.
- Alphabet had a PEG of 0.87 at the end of 2025 (a P/E of 29.0 and EPS growth of 33.3% a year since 2022).
- In Kaplio's Lynch method, a PEG of 1 or less meets Lynch's bar; between 1 and 2 it is close to his bar, and above 2 it is far from it. Those are the same three labels you will see on the stock page.
- The PEG depends on the growth period you pick, and it doesn't work for cyclicals, banks or companies that aren't growing.
Introduction
Alphabet closed 2025 at $313 a share, after earning $10.81 per share that year: a P/E of 29. Costco closed the same day at $862.34, on a P/E of 47. Judged by the P/E alone, both look pricey. But Alphabet's earnings per share grew 2.4-fold between 2022 and 2025, and Costco's 1.4-fold. How much growth are you actually paying for in each one? That's the question the PEG answers, and it was Peter Lynch's favorite tool.
Explanation
The PEG ratio (price/earnings to growth) divides a stock's P/E ratio by the annual growth rate of its earnings per share. The P/E tells you how many times over you're paying for today's earnings. The PEG adds the question it leaves out: how fast are those earnings growing?
Imagine two bakeries, both priced at 20 times annual earnings. One opens two new stores a year and earns 20% more every year. The other has been selling the same amount for a decade. Same multiple, very different deal: with the first one, the earnings you're paying for today double in less than four years. The PEG captures that: 20 divided by 20 gives 1 for the first bakery; 20 divided by 2 gives 10 for the second.
Peter Lynch, who ran Fidelity's Magellan Fund from 1977 to 1990, boiled it down in "One Up on Wall Street": the P/E of a fairly priced company equals its growth rate. A P/E at half the growth rate is a very good sign; at twice the growth rate, a very bad one.
How to calculate it
You need two numbers. The P/E, which is the share price divided by earnings per share (EPS). And the compound annual growth rate of EPS over several years, written as a whole number: 15% goes in as 15, not 0.15. Divide the first by the second.
Lynch suggested a variant for companies that pay dividends: add the dividend yield to the growth rate and divide by the P/E. Note that the ratio is flipped: here, higher is better. Below 1 is poor, 1.5 is acceptable, and 2 or more is what he was looking for.
Formula
PEG = P/E / Annual EPS growth (in %)
P/E = Share price / Earnings per share (EPS)
Compound annual growth rate = (Ending EPS / Starting EPS) ^ (1 / number of years) − 1
Lynch's dividend-adjusted PEG = (EPS growth + Dividend yield) / P/E
Example
The table below shows the PEG of four growth companies, using Kaplio's data: Nvidia, Microsoft, Alphabet and Visa. Read it as how many times over you're paying for annual earnings growth. It uses today's P/E and the compound annual growth rate of diluted EPS over the last three fiscal years, the same method as the walkthrough, so it may not match what you'd calculate from end-of-2025 figures.
Step by step: Alphabet at the end of 2025
1. Closing price on December 31, 2025: $313.
2. Diluted EPS for 2025, from its 10-K: $10.81. P/E = 313 / 10.81 = 29.0.
3. Diluted EPS for 2022: $4.56. In three years it grew 2.37-fold.
4. Compound annual growth: 2.37 raised to the power of 1/3, minus 1 = 33.3%.
5. PEG = 29.0 / 33.3 = 0.87. Below 1: by Lynch's yardstick, you're paying less than the growth.
Your turn. Costco closed at $862.34 on December 31, 2025. Its diluted EPS was $18.21 in fiscal 2025 and $13.14 in fiscal 2022. Work out its P/E, its annual growth rate and its PEG.
Before you look at the answer: do you think Costco comes out more or less expensive than Alphabet on PEG? Answer: a P/E of 47.4, growth of 11.5% a year and a PEG of 4.1. Costco is an excellent business, but at that price you were paying four times its growth.
Real-data example
| Company | Ticker | PEG |
|---|---|---|
| NVIDIA Corporation | NVDA | 0.1 |
| Microsoft Corporation | MSFT | 1.3 |
| Alphabet Inc. | GOOGL | 0.5 |
| Visa Inc. | V | 2.3 |
How to read it
How to read it
These are the thresholds Kaplio's Lynch method applies on its stock pages, using the simple PEG, with the same labels you'll see there:
| PEG | Label | What it means |
|---|---|---|
| 1 or less | Meets its bar | you're paying for the growth or less |
| Between 1 and 2 | Close to its bar | you're paying a bit more than the growth |
| More than 2 | Far from its bar | you're paying more than twice the growth |
If the company also pays a dividend and its adjusted PEG reaches 2, the method moves it up one notch. The PEG only works where earnings grow steadily: stalwarts and fast growers. Lynch didn't use it for cyclicals such as steelmakers or shipping companies, because their earnings rise and fall with the cycle; there, he read the P/E in reverse. Utilities and mature companies growing in line with the economy are judged on their dividend. And it's not the right tool for banks either.
Pitfalls and limitations
1. Growth over which period? Starting from 2022, Alphabet grew 33.3% a year and its PEG was 0.87. Start from 2021 (EPS of $5.61) and four-year growth drops to 17.8%, while the PEG climbs to 1.62. 2022 was a weak year, and the low base inflates growth. That's why Kaplio's Lynch method uses several years.
2. Analyst forecasts. Many websites calculate the PEG with forecast growth. Forecasts tend to run optimistic, and a PEG of 0.8 built on growth that never shows up is a PEG of 2 in disguise.
3. No growth, no PEG. If earnings fall or the company loses money, the PEG comes out negative or infinite and means nothing.
4. Growth that won't repeat. Lynch was wary of growth above 25% a year sustained over many years: few companies pull it off. A low PEG on enormous growth can be the snapshot of a year that won't come back.
Case in point: Nvidia, a PEG that looks too good
Nvidia closed its fiscal 2026 on January 25, 2026. On the Friday before, January 23, its stock closed at $187.67, with diluted EPS for the year of $4.90: a P/E of 38.3. Its EPS had grown 66.7% in one year, from $2.94. PEG = 38.3 / 66.7 = 0.57. Very cheap, by the rule. But three years earlier, in fiscal 2023, its EPS was $0.17. Growth like that can't be projected forward. The useful question isn't how much it grew, but how much it can keep growing. If growth settles at 25%, the same P/E gives a PEG of 1.5.
Practice on Kaplio
Frequently asked questions
What is a good PEG ratio?
Peter Lynch saw a PEG of 1 or less as a reasonable price and 0.5 or less as very attractive. Kaplio's Lynch method uses the same labels as the stock page: 1 or less meets his bar, between 1 and 2 is close to it, and above 2 is far from it. It only holds if growth is sustainable and measured over several years.
Is a PEG ratio of 1.5 good?
It's acceptable, not a bargain. A PEG of 1.5 means you're paying 1.5 times the company's annual earnings growth, which puts it in the "close to its bar" band (between 1 and 2) of Kaplio's Lynch method. Whether it's good depends on how reliable that growth is: a steady grower at 1.5 can beat a shaky one at 0.8.
What is Peter Lynch's formula for calculating the PEG ratio?
Lynch compared the P/E with earnings growth: divide the P/E by annual EPS growth written as a whole number. A P/E of 30 with 15% growth gives 2. For dividend payers he flipped it: add the dividend yield to growth and divide by the P/E. Then 1.5 is acceptable and 2 or more is what he wanted.
What is Nvidia's current PEG ratio?
It moves every day with the price and with each earnings report, so check Nvidia's page on Kaplio for today's figure. For reference, on January 23, 2026 Nvidia traded at a P/E of 38.3 with EPS growth of 66.7% in one year: a PEG of 0.57. Growth that fast rarely lasts, so treat a low number with caution.