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PEG ratio and Peter Lynch fair value

Judge whether a stock’s price is reasonable for its earnings growth, the way Peter Lynch did at the Magellan fund: P/E divided by growth (PEG), the dividend-adjusted version, the fair value where P/E equals growth and Lynch’s six categories, with what to check in each.

Educational simulation. Not investment advice. Results are estimates based on the data you enter and do not replace advice from a qualified professional.

Reviewed on Oct 31, 2026

Example values. Use trailing twelve-month earnings per share and a cautious growth estimate for the next 3 to 5 years.

The stock

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—PEG (P/E ÷ growth)
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Where the stock sits on Lynch’s scale

Below 0.5: very cheap for its growth; up to 1: cheap; up to 1.5: fair price; above 2: expensive.

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Fair value by growth rate

Price at which the P/E equals the growth rate (PEG = 1), with and without dividends, compared with the current price.

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Lynch’s six categories

From the book "One Up on Wall Street". Highlighted: the stock’s category.

Metrics

The summary lists your inputs, results, formulas, assumptions and sources. The full report also includes the charts and interpretations, in color. In the print dialog, choose Save as PDF.

Method, assumptions and sources

Formulas

P/E = price ÷ earnings per share; PEG = P/E ÷ annual earnings growth (in percentage points)
Lynch ratio with dividends = (growth + dividend yield) ÷ P/E: above 2 very attractive, 1 to 2 reasonable, below 1 weak
Lynch fair value = EPS × growth (capped at 25%); with dividends, EPS × (growth + dividend yield)

Assumptions and limits

  • Lynch warned that growth above 25% a year is rarely sustained and did not use the PEG for cyclicals, turnarounds or asset plays.
  • Category suggested from growth: up to 5% slow grower; up to 18% stalwart; above that, fast grower.
  • Calculation tool using data entered by the user. It is not securities analysis or a recommendation to buy or sell; investment decisions are the user’s responsibility.

Official sources and references

Frequently asked questions

How do I calculate the PEG ratio?

Divide the P/E (price ÷ earnings per share) by the expected annual earnings growth in percent. A stock with a P/E of 11 and 15% growth has a PEG of 0.73.

What is a good PEG?

By Lynch’s rule, a PEG of 1 is a fair price, below 1 is cheap and below 0.5 is a bargain. Above 2, the stock is expensive for its growth. The scale works best for steady growers, not for cyclicals or turnarounds.

How is Lynch’s fair value calculated?

Fair value = earnings per share × growth rate (with growth capped at 25%), the price at which the P/E equals the growth rate. With dividends, use earnings per share × (growth + dividend yield).

Does the PEG work for every company?

No. Lynch did not use it for cyclicals, turnarounds or asset plays, and it is meaningless for companies with losses or no growth. For those, look at the business cycle, cash, debt or asset value.

How do I read the result of the example on the page?

With a $22 share price, $2 earnings per share and 15% annual growth, the P/E is 11 and the PEG is 0.73: cheap for its growth. Lynch’s fair value is $30.00 ($38.00 with the 4% dividend yield), 36% above the price, and the ratio with dividends is 1.73, reasonable.

Where do I get the growth estimate?

From the company’s earnings-per-share growth over the last 5 years, analyst consensus or sustainable growth (ROE × share of earnings retained). Prefer the lowest of these: the PEG is very sensitive to growth, and optimism leads to fair values that are too high.

Is Lynch’s fair value the price I should pay?

No. It is a quick check of whether the price is reasonable for the growth. It ignores risk, debt, management quality and the industry cycle. Use it alongside other methods and, if needed, with advice from a licensed professional.

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How to use the PEG ratio and Peter Lynch’s fair value

Peter Lynch ran Fidelity’s Magellan fund from 1977 to 1990 and popularized a simple idea: a stock’s price should be judged against how fast its earnings grow. A P/E of 30 can be cheap for a company growing 40% a year and expensive for one growing 5%.

The PEG ratio

PEG = P/E ÷ expected annual earnings growth (in %)

PEGReading
Below 0.5Very cheap for its growth
0.5 to 1Cheap
1 to 1.5Fair price
1.5 to 2Getting expensive
Above 2Expensive for its growth

Example

A stock priced at $22 with earnings per share of $2 has a P/E of 11. If earnings grow 15% a year, the PEG is 11 ÷ 15 = 0.73: cheap for its growth. Lynch’s fair value, where the P/E equals the growth rate, is $2 × 15 = $30.

The version with dividends

For companies that pay generous dividends, Lynch used (growth + dividend yield) ÷ P/E. Above 2 is very attractive, between 1 and 2 reasonable, below 1 weak. In the example, (15 + 4) ÷ 11 = 1.73.

When the PEG does not work

Lynch did not use the PEG for cyclicals (the P/E looks low at the peak of the cycle), turnarounds (earnings are depressed or negative) or asset plays (value is in the assets, not the earnings). He also distrusted growth above 25% a year: few companies sustain it for long, so fair value is capped at that level.