A More Intuitive Formula for the PEG Ratio

Leo H. Chan ()
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Leo H. Chan: Department of Finance and Economics, Woodbury School of Business, Utah Valley University, Orem, UT 84058, USA

JRFM, 2023, vol. 16, issue 4, 1-10

Abstract: This paper derives a new formula for the price-earnings growth (PEG) ratio, utilizing the insight from Mario Farina’s original equation and Peter Lynch’s assertion that for a stock to be fairly-valued, the PEG and earnings growth rate has to be the same. After deriving the new formula, I demonstrate how the new formula connects with the existing formulas and P/E Ratio. The new formula allows for more flexibility on growth rate assumptions for both earnings and price, is more intuitive, is easier to implement, and can be used to make predictions about future price and earnings growth with current price and earnings. The new formula addresses some of the concerns regarding the usefulness of the PEG Ratio.

Keywords: PEG ratio; value investing; investment valuation (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2023
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