All oftheequitymultiples,otherthanthePEG ratio,ofa
high-growth firm increase with the expected extraordinary
growthrate—thehighertheexpectedgrowth,thehigherthe
valuesforthemultiples.InIllustration8.1,forinstance,the
P/Eratiothatwasestimatedtobe25.38withagrowthrateof
18 percentdropsto16.38iftheexpectedgrowthrateduring
thehigh-growthperiodisonly 8 percent.Similartrendsare
visible with price-to-book and price-to-sales ratios.
WithPEGratios,however,theratioinitiallydecreasesasthe
expectedgrowthincreases,butafterbottomingoutatabout
1.35whentheexpectedgrowthrateis 24 to 26 percent, it
beginsrisingagain.Therearetwoimmediateandimportant
implications. Thefirstis that,contraryto theclaims ofits
adherents,thePEGratiodoesnotfullycontrolfordifferences
ingrowthacrosscompanies.Asageneralrule,lower-growth
companieswilllookovervaluedonaPEGratiobasis,andthis