Value Any Stock in 2 Minutes: PE, PEG, and PEGY Ratios Explained

What PE Ratio Measures

The price-to-earnings ratio divides stock price by earnings per share. It tells you how many dollars you pay for every dollar the company earns. A lower PE ratio suggests a cheaper stock, but it ignores growth potential.

10

PE Ratio Example: $30 stock price ÷ $3 earnings per share

You pay $10 for every $1 the company earns

PE Ratio's Critical Flaw

PE ratio alone is misleading because it doesn't account for earnings growth. A company with PE of 30 could be cheaper than one with PE of 10 if the first company grows much faster.

PEG Ratio Definition and Calculation

Price-to-Earnings-to-Growth ratio divides the PE ratio by the company's earnings growth rate. It was developed by Mario Farina and popularized by Peter Lynch during his legendary 13-year run at Fidelity Magellan, where he delivered 29% annual returns.

29%

Peter Lynch's Annual Returns at Fidelity Magellan (13 years)

Lynch's track record using PEG and PEGY ratios

PEG Ratio Comparison Example

Two companies with different PE and growth rates can be compared directly. Company A with PE 30 and 30% growth has PEG of 1.0; Company B with PE 10 and 5% growth has PEG of 2.0, making Company A the better value.

Lower PEG ratio indicates better value despite higher PE

Lynch's PEG Rule

Peter Lynch's simple rule: a PEG ratio below 1.0 suggests the stock might be undervalued, while a PEG above 1.0 suggests it might be overvalued.

PEGY Ratio Definition

The PEGY ratio is Peter Lynch's masterpiece, adding dividend yield to the equation. You calculate it by dividing the PE ratio by the sum of the growth rate plus the dividend yield. It provides the most complete valuation picture by considering price, earnings, growth, and cash dividends.

PEGY Ratio Calculation Example

A company with PE of 30, growing at 30% per year, and paying a 3% dividend has a PEGY ratio of 0.9 (30 ÷ (30 + 3)). Like PEG, a PEGY below 1.0 suggests undervaluation.

Step-by-step PEGY calculation

Why PEGY Rewards Dividend Payers

Two companies with identical PE ratios and growth rates will have different PEGY ratios if one pays dividends. The dividend-paying company gets a better PEGY ratio because investors receive cash today while waiting for the company to grow.

Identical PE and growth; dividend payer has better PEGY

Lynch's Real-World Winners

Peter Lynch used the PEGY ratio to identify incredible early-stage growth companies including Dunkin' Donuts, Taco Bell, and Home Depot before they became household names.

Companies Lynch identified using PEGY analysis

Three-Step Valuation Process

First, calculate PE ratio for baseline valuation. Second, calculate PEG ratio to see if growth justifies the price. Third, calculate PEGY ratio to get the complete picture including dividends. This layered approach progressively reveals more about a stock's true value.

Lynch's systematic valuation framework

Ratios Are a Starting Point, Not the Whole Story

No single ratio tells the complete story. While PEGY is a fantastic starting point, investors must also evaluate the company's financial health, competitive position, long-term prospects, and risks. Price is not everything—understanding the business is equally critical.