PEG Ratio: Pricing a Stock Against Its Growth

A neighbour stopped me at the lift last results season, phone open to a stock app, genuinely upset. "This company trades at 85 times earnings. Eighty-five! That's insane. Meanwhile I found one at 9 times — that's the cheap one, no?" He'd already decided. The big number was dear, the small number was cheap, and that was that.

He had the arithmetic right and the conclusion backwards. The expensive-looking one, by the only test that matters, was arguably the fairer buy — and the "cheap" one was the trap. Sorting that out is the whole job of one small ratio, and once you see it you can't unsee it.

What the P/E leaves out

The P/E ratio — price-to-earnings, the share price divided by the profit per share — answers one question: how many years of today's profit am I paying for? A P/E of 85 means you're handing over 85 rupees for every 1 rupee the business earns this year. On its own, that does sound mad.

But the P/E has a blind spot the size of a building. It only looks at this year's profit. It says nothing about next year's, or the one after. And a business that doubles its profit every couple of years is a completely different animal from one whose profit hasn't moved in a decade — even if they wear the same P/E on the screen.

Think of two saplings at a nursery. One is a slow shade tree that will look much the same in ten years. The other is a fast grower that will be three times the size by the time the first has barely stretched. The nursery charges more for the fast one. Of course it does. Paying up for the sapling that grows fast isn't foolish — paying up for the one that won't grow is. The price tag alone can't tell you which is which. You have to ask how fast the thing grows.

That question is exactly what the PEG ratio adds.

The PEG ratio, in one line

PEG stands for price/earnings-to-growth. You take the P/E and divide it by the company's profit growth rate (in percent):

PEG = P/E ÷ annual profit growth %

The idea comes from Peter Lynch, who ran Fidelity's Magellan fund and compounded it at roughly 29% a year for over a decade. His rule of thumb was disarmingly simple: "The P/E ratio of any company that's fairly priced will equal its growth rate." (Peter Lynch, One Up on Wall Street, via Wikipedia). In other words, a fairly priced grower should have a PEG of about 1. Below 1, you may be paying less than the growth deserves. Well above 1, you're paying up — maybe too much.

It's a rough tool, not a law of nature. But it does the one thing the P/E refuses to do: it puts the price and the growth in the same sentence.

Working it through on a real grower

Let me use the company my neighbour was scared of: Trent, the Tata-group retailer behind Westside and the fast-fashion chain Zudio. (This is an example to learn the maths on, not a buy or sell call — I have no idea what its shares will do next.)

Trent is, unambiguously, a fast grower. In FY25 alone it added around 284 new fashion stores, ending the year with Westside at 248 and Zudio at 765 outlets (Storyboard18, April 2025). That expansion shows up in the numbers. Here is the profit record (Inve data, 2026):

Now the valuation. At a market value of about ₹1,45,874 crore against FY26 net profit of ₹1,721 crore, Trent trades at a P/E of roughly 85 (Inve data, 2026). That's the scary number.

But look at the growth. Net profit went from ₹394 crore in FY23 to ₹1,721 crore in FY26 — that's a compound growth rate of about 63% a year over three years. Run Lynch's sum: a P/E of 85 against ~63% growth gives a PEG of about 1.3. Not cheap. But nowhere near the four-times-too-expensive that "85 times earnings!" makes it sound. For a business roughly quadrupling its profit in three years, a PEG near 1.3 is in the zone of "paying up for the fast sapling," not "lost your mind."

The big P/E and the fair-ish price live together comfortably. The growth pays for the P/E.

Now the "cheap" stock — and why low can be dear

Hold that next to my neighbour's bargain. Take Coal India, which trades at a P/E of about 9 (Inve data, 2026) — looks a third the price of Trent and a tenth as scary. But its profit went the wrong way: from about ₹37,369 crore in FY24 to ₹31,071 crore in FY26, a fall of roughly 17% (Inve data, 2026).

What's the PEG of a business whose profit is shrinking? It doesn't even compute — you can't divide by negative growth and get a sensible number. And that is the answer. A low P/E on a business that isn't growing isn't a discount; it's the market telling you it doesn't expect tomorrow to be better than today. The slow shade tree, priced as a slow shade tree.

This is the reframe my neighbour needed: a high P/E can be cheap and a low P/E dear, because price without growth is only half the picture. The number 85 isn't expensive and the number 9 isn't cheap — not until you know what each one is growing at. Buffett put the whole point in one sentence in his 1992 letter to shareholders: "the two approaches are joined at the hip: Growth is always a component in the calculation of value…" (Berkshire Hathaway, 1992). Value and growth aren't rival camps. Growth is a part of value. PEG is just the back-of-envelope way of stitching them together.

Where PEG quietly breaks — read this part twice

PEG is a starting question, not a verdict, and it has real failure modes. Use it knowing them.

The growth number is the whole game — and it's slippery. I used Trent's three-year profit CAGR of ~63%. But look again at the table: from FY25 to FY26, net profit grew only about 12% (Inve data, 2026), not 63%. Plug that in and the PEG balloons past 7 — "wildly expensive." Same company, same day, same price; one input changed and the verdict flipped. Which growth rate is "true"? Nobody knows — it depends on whether the next few years look like the explosive past or the cooler recent quarter. Whoever picks the growth number picks the answer. Treat any PEG quoted to you as an argument about the future dressed up as a fact.

One-off years poison it. Trent's FY24 profit of ₹1,478 crore was flattered by an exceptional item, which is partly why the three-year growth looks so heroic. Sales growth — about 34% a year over the same stretch (Inve data, 2026) — is steadier and harder to fake than profit, and worth checking alongside.

And the growth has to actually arrive. A PEG of 1.3 is only fair if the company keeps growing the way the number assumes. The day it stops, the high P/E stops being cheap and becomes exactly the trap my neighbour feared. This is the honest case against paying up: you are buying a forecast, and forecasts are where investors get hurt.

This is the part a single ratio can never capture — whether next year's growth shows up, quarter after quarter. The plain way to check is to read what management actually guided and then see if they delivered it, every results season, across every stock you hold. Nobody can do that by hand for ten companies; it's the job a tool like Inve's Promise Tracker exists to do. The ratio tells you the price of the growth. Only the follow-through tells you whether the growth was real. (And remember the wider lesson from earlier in this series — even a wonderful grower can be a poor investment if you overpay, which is the whole idea of a margin of safety.)

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