📚 Stock Market Glossary
Clear, beginner-friendly explanations, real-world analogies, and visual formulas for key stock market terminology.
PEG Ratio (Price/Earnings-to-Growth)
Valuation💡 Key Takeaway: A stock's price-to-earnings (P/E) ratio divided by the growth rate of its earnings for a specified time period.
Runner Analogy: Athlete A costs $10 with a 5% speed gain. Athlete B costs $30 but speeds up 60% every year. Measuring price per growth unit (PEG 0.5) proves Athlete B is the superior bargain!
😎 10-Second Show-off Pro Tip for Friends!
😎 Show-off Tip: Say, 'Peter Lynch loved using PEG! A tech stock with a PER of 40 isn't expensive if its earnings grow 50% a year, bringing its PEG to 0.8.'
📖 Beginner-Friendly Explanation
STEP 1
Core Concept & Meaning
PEG modifies the traditional P/E ratio by factoring in a company's expected earnings growth rate.
STEP 2
Why It Matters & Mechanism
PEG = PER ÷ Annual EPS Growth Rate.
STEP 3
Practical Investment Tips & Pitfalls
Pioneered by legendary investor Peter Lynch:
- PEG = 1.0: Stock is fairly valued relative to growth.
- PEG < 1.0 (e.g. 0.5): Stock is fundamentally undervalued relative to its high growth rate—a prime buying target!
- PEG > 2.0: Stock is overpriced relative to earnings momentum.
📊 PEG Calculation and Peter Lynch Evaluation Criteria
PEG = PER (30x) ÷ Expected annual profit growth (50%) = 0.6x
▶ PEG < 1.0x: Stock price strongly undervalued relative to growth potential (Peter Lynch purchase strongly recommended!)
▶ PEG > 2.0x: Warning of stock price bubble overvalued relative to growth
⚖️ Key Comparison at a Glance
| Category | Company A (traditional manufacturing) | B Company (AI Big Tech) |
|---|---|---|
| Current stock price PER | 10x (looks cheap) | 30x (seems expensive) |
| Annual Profit Growth Rate | 5% (slow growth) | 50% (Storm growth) |
| PEG Index (PER÷Growth Rate) | 2.0 times (overvalued compared to growth!) | 0.6 times (tremendously undervalued compared to growth!) |
| Peter Lynch Diagnosis Results | Not recommended for purchase as only PER is low and there is no growth | Strong buy considering growth potential with PEG below 1.0 |
📌 Practical Market & Real-World Example
Trading at a 35x PER, the chipmaker's 50% EPS growth delivered a PEG of 0.7, attracting heavy institutional buying.