Peter Lynch Fair Value Formula & Calculator

Lynch never wrote down a spreadsheet formula, but his rule from One Up on Wall Street translates into one directly: "The P/E ratio of any company that's fairly priced will equal its growth rate." Two versions are in common use:

Many stock screeners use the simple version with a 5-year growth rate capped between 5 % and 25 %. This calculator uses the dividend version because Lynch himself added the yield: a company growing 12 % and paying 3 % earns a fair P/E of 15, not 12. Set the dividend to 0 and you get the simple version.

Example: A stock earns $4 per share, grows 15 % a year and pays a 1.5 % dividend. Fair P/E = 15 + 1.5 = 16.5. Fair value = $4 × 16.5 = $66. At a price of $70 the actual P/E is 17.5 and the Lynch ratio is 16.5 ÷ 17.5 = 0.94: slightly expensive.

Second example, a slow grower: EPS $6, growth 4 %, dividend yield 3 %, price $120. Fair P/E = 7, fair value = $42, actual P/E = 20, Lynch ratio 0.35. The formula says it plainly: this is a growth multiple paid for a company that barely grows.

The PEG ratio is the same idea written the other way round: PEG = P/E ÷ earnings growth. A PEG of 1 is fair, below 1 is cheap for the growth you get, above 1.5 to 2 is expensive. Lynch's dividend version is often called the PEGY ratio: P/E ÷ (growth + dividend yield).

The Lynch ratio in this calculator is the inverse of the PEGY, so the reading flips: above 1 is cheap, below 1 is expensive. Lynch himself wrote that a P/E of half the growth rate is very positive and a P/E of twice the growth rate is very negative, which is a PEG of 0.5 and 2.0. If you prefer the PEG view, the PEG ratio calculator computes it directly.

The growth rate is the only real estimate in the formula, so it decides the result. Use the expected earnings-per-share growth for the next 3 to 5 years, checked against the last 5 years and against analyst estimates. Three rules keep the number honest:

• Below 10 %: Lynch called these slow growers and stalwarts. The formula still works, but the fair P/E stays low and the stock rarely looks cheap.
• 10 % to 25 %: the fast growers the rule was made for.
• Above 25 %: almost no company keeps that up for five years. Cap the rate at 25, as most screeners do; this calculator caps the fair P/E at 40 in any case.

And keep both sides on the same basis: trailing EPS with historic growth, or forward EPS with forward growth, never mixed.

The key number is the Lynch ratio = (growth + dividend) ÷ actual P/E. At a glance:

• Above 1.5: attractively valued, you pay little for the growth.
• 1.0 to 1.5: fairly valued.
• Below 1.0: expensive, you pay more than the growth justifies.

Lynch himself looked for a ratio well above 1, preferably in solid, understandable businesses. The fair value per share next to it is the same idea expressed as a price: if the current price is below it, the ratio is above 1.

The formula is deliberately simple. Use it as a quick check, not the last word:

• Loss-makers and turnarounds: no EPS, no result.
• Cyclicals: peak earnings plus peak growth produce a fair value that collapses with the cycle. Use mid-cycle EPS.
• Banks and insurers: earnings growth says little about their value; book value works better.
• Balance sheet and cash flow are ignored: two companies with the same EPS and growth get the same fair value, even if one carries heavy debt. That is why a robust fair value combines several models.

If you keep your own sheet, both versions fit into one cell each. With EPS in A2, growth in % in B2, dividend yield in % in C2 and the price in D2:

Enter growth as a whole number (15, not 0.15). The calculator above does the same math live and shows the interpretation next to the number.

Lynch did not stop at the formula. He wanted profitable growth at a fair price: rising earnings, a P/E below the growth rate, little debt and a business you understand. Our Fair Value Calculator has exactly that as a ready-made screen: the Peter Lynch GARP screen filters North American stocks for growing earnings at a moderate P/E and PEG, positive free cash flow and moderate debt, sorted by distance to our fair value. Every stock there also shows the Lynch fair value among its models.

Dr. Peter Klein, founder of Fair Value Calculator: "Peter Lynch is a true legend in the world of investing. With the Magellan Fund he achieved an average annual return of around 29 % between 1977 and 1990. Was that luck? I don't think so. His style was pragmatic and grounded, always looking for businesses he understood. The calculator on this page applies his rule of thumb. Even though we rely on valuation models with many data points today, Lynch shows that successful investing does not have to be complicated, but it has to be consistent."