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Going deeper · 4 min read

PEG: putting growth into the price tag

P/E punishes fast-growing companies, because today's profit is small compared with tomorrow's. PEG tries to fix that by dividing the P/E by the expected growth rate.

As a rough rule, a PEG near 1 suggests the price and the growth are roughly in balance; well above 2 suggests you're paying ahead of the growth.

It's only as good as the growth forecast behind it, and forecasts for exciting companies are the least reliable of all. Use it to frame a question, not to settle one.

Remember

PEG asks whether the growth you're paying for is actually arriving.

See a real example

Compare Nvidia, Microsoft and Coca-Cola

High growth, steady growth and almost none — at three prices.

What this shows

The expensive-looking one can be the reasonable one once growth is included — and the cheap one can be cheap for a reason.

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