P/E, PEG and PEGY: useful, not scripture

As part of my work, I do hotel project valuations — and lately I’ve been building the mother of all hotel valuation + feasibility sheets.

In the process, I’ve sat in boardrooms where EV/EBITDA and P/E are used as gospel for valuation.

They’re useful.
But they’re not scripture.

So I feel compelled to share a few thoughts on these ratios. In future posts, I’ll share practical tools for valuation — DCF, Market Cap–based heuristics, P/E with built-in sensitivity, and a risk-scenario layer you can stress-test in minutes.

But for now, here are some thought starters:

1) P/E Ratio — the “price tag” on earnings

What it tells you: how much the market is paying for ₹1 of earnings.

Formula:
P/E = Share Price ÷ Earnings Per Share (EPS)
(or Market Cap ÷ Net Profit)

Example: If a stock is ₹500 and EPS is ₹25 → P/E = 20×
Meaning: investors are paying ₹20 for every ₹1 of annual earnings.

Why it can mislead: P/E doesn’t tell you whether those earnings are growing, sustainable, or cyclical.

2) PEG Ratio — P/E adjusted for growth

If P/E is the price tag, PEG asks what you’re paying for growth.

Formula:
PEG = (P/E) ÷ Growth Rate
(typically expected annual EPS growth %)

Rule-of-thumb interpretation (not a law):
• PEG < 1 → growth may be “cheap” relative to price (potential undervaluation)
• PEG ≈ 1 → broadly “fair”
• PEG > 1 → you may be overpaying for growth (potential overvaluation)

Credit where it’s due: PEG was widely popularised by Peter Lynch (often also attributed to earlier work by Mario Farina).

3) PEGY Ratio — growth + dividend yield

PEG ignores dividends, which matter when returns come from growth + cash yield.

Formula:
PEGY = (P/E) ÷ (Growth Rate + Dividend Yield)

Same broad interpretation:
• PEGY < 1 → potentially undervalued for growth + yield
• PEGY > 1 → potentially overvalued for growth + yield

A simple checklist (when to use what)

Use P/E when: earnings are stable and comparable within the same sector.
Use PEG when: growth is the thesis (and earnings are not distorted).
Use PEGY when: dividends are meaningful and consistent.

Be cautious when: earnings are cyclical, forecasts are “story-led,” or leverage is high (ratios can look “cheap” while risk rises).

Why I take these “rules” seriously

The heuristics became famous for a reason: Peter Lynch’s 13-year run managing Fidelity Magellan is widely reported at roughly ~29% annualised — which is exactly why his “growth at the right price” lens still echoes in markets today.