In a volatile market like present times — marked by global uncertainties, intermittent buying at dips, foreign outflows, and fluctuating risk appetite — valuations are under constant scrutiny.
In this backdrop, the PEG ratio is emerging as a much-needed reality check by tying price more closely to growth.
The PEG or (Price/Earnings-to-Growth) ratio compares a stock’s price to earnings (P/E) with its expected earnings growth, typically over the next couple of years, to assess whether its valuation is justified.
A PEG around 1 is seen as fair value, below 1 may indicate undervaluation, and above 1 could signal overpricing — helping investors separate genuine growth stories from stocks that look expensive without enough momentum, explained market participants.
When money chases growth stocks, PEG helps assess whether high P/E multiples are justified by earnings growth, since a rise in P/E only makes sense if earnings grow at a similar pace, explained Rohit Srivastava, founder and market strategist at equity-research firm indiacharts.com.
Cheap isn’t always cheap
Aniruddha Sarkar, co-founder & CIO, Equinova Investment Managers, pointed out that companies with low P/E but high PEG ratios may look cheap at first glance but lack the growth to justify it.
In contrast, stocks with high P/E but low PEG ratios usually reflect strong earnings momentum, where the premium is backed by solid growth prospectsm he added.
For instance, La Opala trades at a trailing P/E of 18.6 with a steep PEG of 27.8, suggesting limited growth support, while 360 One WAM, despite a higher P/E of 34.8, has a more reasonable PEG of 1.5. Force Motors stands out even more, with a P/E of 30.3 but a low PEG of 0.3, indicating strong growth backing its valuation, he highlighted.
As liquidity tightens and valuations come under pressure, stocks with stretched PEGs are often the first to correct, while those with reasonable PEGs tend to hold up better. In that sense, PEG keeps investment decisions anchored to fundamentals rather than market mood, market participants said.
“PEG becomes more important because it links valuation with expected growth, helping investors judge whether a stock’s price is justified even when earnings visibility is uneven. This is especially useful when markets are reacting to uncertainty,” said Sarkar of Equinova.
Not a standalone tool
Even Vinay Jaising, chief investment officer and head of equity advisory at ASK Private Wealth, feels, “The PEG ratio remains a valuable valuation tool in volatile markets as it adjusts the price-to-earnings multiple for expected earnings growth, enabling more meaningful comparisons across companies”.
However, since PEG relies on earnings forecasts that can be uncertain, he believes it should be used alongside fundamentals like cash flows, leverage, and return ratios.
Jaising also cautioned that relying solely on the P/E ratio can be misleading, as it reflects only a company’s current valuation based on existing earnings per share. While it helps gauge how the market prices current performance, it offers limited insight into future growth, he believes.
In volatile environments, companies with similar P/E ratios can have very different earnings trajectories — where a high P/E may be justified by strong growth prospects, while a low P/E could signal weaker future performance, he added.
“Therefore, investors increasingly complement P/E with forward-looking metrics like PEG to better assess valuation in the context of expected earnings growth.”
P/E in perspective
Bino Pathiparampil, Head of Research at Elara Capital, is also of the opinion that PEG ratio, in conjunction with PE ratio, gives a more realistic picture.
PEG ratio is not independent of PE ratio; in fact, PEG ratio is an assessment of the PE ratio at which a particular stock is trading, he added.
“A high P/E can be reasonable for a fast-growing business, and PEG helps you see that. P/E alone only shows how expensive the stock looks today, not whether that price is justified by future growth.”
Interestingly, post-covid, valuations have also shifted towards market cap-to-sales, as many new-age companies prioritize revenue growth first and profitability later, pointed out Srivastava of indiacharts.com.
During the dot-com bubble, growth tech stocks were expanding at 50–100%, pushing valuations to extreme levels. For instance, Infosys traded at P/E multiples of around 150, but with earnings growing close to 100%, investors justified this through a PEG of about 1.5, which did not appear excessively stretched, he noted.