PEG ratio: adjusting the P/E for earnings growth

The P/E ratio tells you what investors pay for a dollar of earnings, but not what those earnings are expected to become. A company growing profits 25% a year deserves a higher P/E than one growing 3%, all else equal. The PEG ratio tries to put both in one number: the P/E divided by the earnings growth rate.

It is a quick, appealing shortcut, made famous as a rule of thumb by the fund manager Peter Lynch. It is also fragile, because the growth rate in its denominator is a choice: which years, GAAP or adjusted, past or forecast. Change the growth rate and the PEG can double.

This page calculates Apple's PEG at the end of fiscal 2025 two ways, explains Lynch's heuristic and the dividend-adjusted PEGY, and lists the ways the ratio misleads.

The formula

The growth rate is entered as a number of percentage points, not a decimal: 22.7% growth is 22.7, not 0.227. The P/E and the growth rate should match in time: a trailing P/E with historical growth, or a forward P/E with forecast growth. Data providers commonly use a forward or five-year expected growth rate from analysts; others use trailing growth. As with the P/E itself, check the definition before comparing two sources.

Apple's two PEG ratios

Same company, same price, same P/E. On the first number Apple looks close to Lynch's "fair" zone; on the second it sits well above the 2.0 level the heuristic treats with skepticism. Which is right? For measuring the business's underlying growth, the adjusted figure is the better base: the tax charge was a one-time item that did not touch revenue or operating income, and Apple's operating income grew 8.0% in fiscal 2025 ($133,050M ÷ $123,216M − 1), much closer to 10.5% than to 22.7%. The GAAP growth rate is real arithmetic but mostly measures the charge falling away.

The general lesson: a PEG is only as good as its growth rate, and one-year growth rates are easily distorted. A base year with a one-off loss makes growth look fast and the PEG low; a base year with a one-off gain does the opposite. Using a multi-year average growth rate, or checking the growth rate against revenue and operating income, is the defence.

A forward-looking PEG

The PEG's logic is about the future: investors pay for growth to come, not growth that has happened. So the more meaningful version uses expected growth. With hindsight, Apple's EPS over the four quarters after September 26, 2025 was $8.72, a gain of $8.72 ÷ $7.46 − 1 = 16.9% over fiscal 2025. A PEG on that realized growth would be 34.2 ÷ 16.9 = 2.03.

Nobody could have computed that on the day; it shows where a perfectly forecast PEG would have landed, between the two backward-looking figures. A real forward PEG uses the analysts' consensus growth rate, with all the estimate error the Forward P/E ratio: valuing a stock on expected earnings page describes. A growth estimate is also more uncertain than an EPS estimate: a forecast of 15% growth that turns out to be 10% raises the PEG by half.

Lynch's rule of thumb

Peter Lynch, who ran Fidelity's Magellan fund from 1977 to 1990, popularized the comparison of P/E with growth in his 1989 book One Up on Wall Street. His heuristic, in paraphrase: a fairly priced company's P/E is about equal to its growth rate, so a P/E of half the growth rate looks attractive and a P/E of twice the growth rate looks expensive. In PEG terms, about 1.0 is "fair", well below 1.0 is a possible bargain, and around 2.0 or above deserves skepticism.

Treat it as Lynch offered it, a quick screen for further work, not a valuation model. It has no theoretical basis for the number 1: there is no reason a P/E should equal a growth rate in percent. It ignores interest rates, risk and how long the growth lasts, and it says nothing about companies whose profits are not growing at all.

PEGY: adding the dividend

Mature companies often grow slowly but pay large dividends, which are part of the shareholder's return. Lynch suggested adding the dividend yield to the growth rate for such companies. The result is sometimes called the PEGY ratio, or dividend-adjusted PEG.

For Apple the adjustment barely matters, because its dividend yield is small: Apple returns most of its cash through buybacks ($90.7 billion in fiscal 2025) rather than dividends ($15.4 billion). Buybacks already show up in the PEG through faster EPS growth (see Earnings per share (EPS): basic vs diluted, with Apple’s numbers). PEGY matters more for utilities, consumer staples and other high-payout companies, where a 3–4% yield can be a large share of the total return.

Pitfalls

• Low or negative growth. With growth near zero, the PEG explodes; with negative growth it is meaningless. A slowly shrinking company with a P/E of 8 has no useful PEG.
• Very high growth. A start-up growing EPS 80% from a tiny base will show a low PEG, but that growth rate cannot last. The PEG ignores duration: 20% growth for two years and for ten years give the same PEG and are worth very different amounts.
• Distorted base years. As Apple shows, a one-time item in the base can halve the PEG.
• Mixed timing. A trailing P/E divided by a forward growth rate (or the reverse) mixes two periods. Use matched pairs.
• Risk and capital needs. Two companies growing at the same rate can carry very different debt, cyclicality or reinvestment needs. The PEG treats them the same.
• Interest rates. When rates are high, every P/E tends to be lower, so the "fair" PEG shifts over time. A fixed threshold ignores that.

PEG and its neighbours

The Discounted cash flow (DCF): a step-by-step valuation on Apple approach is what the PEG tries to shortcut: it values growth explicitly, year by year, and discounts it for time and risk. The PEG compresses all of that into one division, which is why it works as a screen and fails as a valuation.

How Finabase does it

The summary page at /symbol/aapl shows a PEG ratio in its Key statistics, next to Trailing P/E and Forward P/E. The value is passed through from the data provider; Finabase does not compute it, and the provider's growth rate (typically an expected rate rather than last year's) is unlikely to match either figure on this page.

To build your own, the Valuation tab charts EPS (diluted) year-over-year growth and the P/E for ten fiscal years, and the Financials tab has quarterly and annual diluted EPS. Comparing the growth bars across several years shows quickly whether one year's growth rate is representative.

Frequently asked questions

What is a good PEG ratio?

By Peter Lynch's rule of thumb, around 1.0 suggests a fair price for the growth, under 1.0 a possible bargain, and well above 1.0 an expensive one. It is a screening heuristic; the result depends heavily on which growth rate is used.

How do you calculate the PEG ratio?

Divide the P/E ratio by the annual EPS growth rate expressed in percent. Apple's P/E of 34.2 divided by 22.7% GAAP EPS growth gives a PEG of 1.51.

Should the PEG use past or future growth?

Future growth fits the logic better, because investors pay for growth still to come, but it depends on estimates. Past growth is factual but can be distorted by one-off items, as Apple's fiscal 2024 tax charge shows. Whichever you use, match it to the matching P/E.

What is the PEGY ratio?

It is the PEG with the dividend yield added to the growth rate: P/E ÷ (growth % + yield %). It credits companies that return much of their profit as dividends. Apple's PEGY on GAAP growth was 1.48.

Summary

The PEG ratio divides the P/E by the EPS growth rate to account for growth in one number. On September 26, 2025 Apple's P/E of 34.2 gave a PEG of 1.51 on GAAP growth of 22.7% and 3.26 on adjusted growth of 10.5%; the difference is a single one-time tax charge in the base year, and Apple's 8.0% operating income growth supports the adjusted reading. Peter Lynch's rule of thumb treats a PEG near 1 as fair, PEGY adds dividends to the growth rate, and both work best as quick screens. Check the growth rate's source, period and base year before trusting any PEG.