A More Intuitive Formula for PEG Ratio

Abstract

In this note, I derive a new formula for PEG ratio, utilizing the insight from Farina’s (1969) original equation and Lynch’s (1989) 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 formula. The new formula allows for more flexibility for growth rate assumptions, is more intuitive, and easier to implement and can be used to make predictions about future price and earnings growth.

Keywords: PEG Ratio, Value Investing, Investment Valuation

JEL Classification: G40, G10, G20