Peter Lynch, one of the greatest fund managers ever, uses PEG as a 'number worth noticing'.
The P/E ratio of any fairly priced company will equal its growth rate...Generally, a P/E that's half the growth rate is very positive, and one that's twice the growth rate is very negative. We use this measure all the time when analyzing stocks for mutual funds.
PEG ratio can be calculated based on past earnings growth or future expected growth rate, but Peter Lynch has the following advice:
If your broker can't give the company's growth rate, you can figure it out by taking the annual earnings from Value Line or an S&P report and calculating the per cent increase from one year to the next. That way, you'll end up with another measure of whether a stock is or is not too pricey. As to the all-important future growth rate, your guess is as good as mine
We calculate PEG as follows:
A PEG ratio of less than 0.5 is considered attractive, while ratios above 2 are unattractive.
It should be noted that PEG cannot be used in all companies. Cyclical companies, for instance, will have a low PEG ratio, but buying these stocks at a low point is a proven method for losing half your money quickly. Conversely, companies that had a few tough years will show a high PEG ratio, but business could soon pick up.