PEG Ratio.

The PEG ratio adjusts the price-to-earnings ratio for expected earnings growth, dividing the P/E by the company's projected annual earnings growth rate expressed as a percentage. The result normalizes valuation across companies growing at different speeds: a company with a P/E of 30 and earnings growing at 30% per year has a PEG of 1.0, while a company with a P/E of 15 and growth of 5% has a PEG of 3.0 — the slower grower is arguably more expensive on a growth-adjusted basis despite its lower P/E. Peter Lynch popularized the PEG ratio in his book "One Up on Wall Street," arguing that a PEG below 1.0 often signals an undervalued stock relative to its growth prospects, while a PEG above 2.0 suggests the market is pricing in optimism that may not be warranted. The metric is most useful for growth-oriented investors who accept that fast-growing companies deserve higher P/E multiples and want a simple way to gauge whether the premium is proportionate. Limitations abound. Growth estimates are notoriously unreliable — analysts frequently overestimate earnings growth, particularly for recently successful companies. The PEG ratio also ignores the quality of earnings, balance sheet strength, competitive dynamics, and the sustainability of the growth rate itself. A company growing at 40% through heavy customer acquisition spending may have a PEG that looks attractive but a business model that cannot sustain those economics. Despite these caveats, the PEG ratio remains a practical first-pass tool for filtering growth stocks and for explaining why a high P/E may or may not be justified when the underlying business is expanding rapidly.