How to Adjust the P/E Ratio for Earnings Growth in Equity Valuation: PEG or PPP?

The Price-to-Earnings (P/E) ratio remains a cornerstone of equity valuation, yet it overlooks essential dimensions such as earnings growth and risk. The Price-to-Earnings to Growth (PEG) ratio was developed to address this gap but provides only a linear and often oversimplified adjustment. This paper presents the Potential Payback Period (PPP) as a more robust and comprehensive alternative. By incorporating compound earnings growth and risk-adjusted discounting within a time-based valuation framework, PPP extends the traditional P/E ratio while addressing key limitations of the PEG approach. A visual framework — the Hidden Value Zone (HVZ) — highlights how PEG may misclassify certain high-growth stocks that PPP more accurately identifies as undervalued. Theoretical insights and empirical illustrations together support the PPP as a more relevant and effective valuation methodology in today’s dynamic market environment.