Peter Lynch managed the Magellan Fund to one of the best records in investing history, and the valuation rule attached to his name fits in one line: a fairly priced stock trades at a price-to-earnings ratio equal to its earnings growth rate plus its dividend yield. This page opens Stock Valuation Studio on that model.
The Rule
Lynch divided growth stocks into kinds and priced the steady kind with a simple test. A company growing earnings at twelve percent a year, paying a one percent yield, fairly carries a price-to-earnings ratio of thirteen. Pay much more than that and the buyer needs the growth to accelerate; pay less and the market is offering growth at a discount. Multiply the fair ratio by earnings per share and the test becomes a fair value:
The quick screen behind the rule is the PEG ratio, the price-to-earnings ratio divided by the growth rate. Lynch treated a PEG well under one as interesting and a PEG well above one as a price that had outrun its business. The Studio growth input comes from the company's own filed record, so the rule judges the growth the company has actually delivered, not the growth an analyst hopes for.
A Worked Example: Apple
Apple reported diluted earnings per share of $7.46 for fiscal 2025. Total earnings, the net income line, grew from $94,680 million in fiscal 2021 to $112,010 million in fiscal 2025, which is about 4.3 percent a year. The trailing dividend yield stood at 0.31 percent. The rule gives:
The Studio prints $34.33, carrying the inputs unrounded. Against a market price of $342.58, a price-to-earnings ratio of 45.9, the rule is not mildly negative; it is categorical. Earnings per share grew faster than total earnings, about 7.4 percent a year, because Apple bought back shares along the way, but even on that kinder measure the fair ratio would sit near eight, against a market ratio near forty-six.
That severity is the design, not a defect. Lynch wrote the rule for stalwarts, steady growers bought at reasonable multiples, and he sold or avoided holdings whose prices outran their growth. A company can be superb and still fail this test for years, as Apple has. The rule measures the price against the delivered growth, and it refuses to capitalize greatness in advance.
When the Rule Fits, and When It Does Not
Best for profitable companies with steady, measurable growth and a price that can plausibly be compared with it: the stalwarts Lynch built the test for, growing earnings at a moderate pace year after year.
Not for cyclical and lumpy growers. One record can flatter or damn the growth input depending on where the cycle stands. The better tools look through the cycle: the earnings power value, which prices the average earnings of the whole record with no growth assumed, and the DCF calculator, which projects the cash flow directly.
Not while earnings are negative, and not where the record shows no growth. There is no ratio to form. A loss maker with real revenue belongs on the revenue-build DCF. A profitable company priced on its balance sheet belongs on the Graham number.
The rule also ignores the balance sheet entirely: a company carrying heavy debt earns the same fair value as a debt-free twin. The DCF calculator answers that gap directly, because it adds net cash and subtracts net debt. That is why the Studio runs the rule as one voice among thirty-one and not as a verdict on its own.
Questions
Why does yield enter the formula? Because a dividend is part of the return and does not need growth to justify price. A slow grower paying a real yield fairly carries a higher multiple than the same grower paying nothing, and Lynch's formula credits it in the simplest possible way, point for point.
Does the rule use forecast growth? No. It uses the growth in the filed record. Forecasts belong to the forward estimate model and to the discounted cash flow anchor, where they are labeled as estimates. Lynch's rule judges what has been delivered.
What does a very low Lynch value mean? That the price rests on something other than delivered earnings growth: on acceleration expected, on assets, on a franchise. Sometimes the market is right. The rule makes the buyer name what is being paid for, which was always its purpose.
Free Tool
Enter any US ticker and the Studio multiplies the latest filed earnings per share by the sum of the record earnings growth and the trailing dividend yield. No settings to choose: the rule is the rule, exactly as Lynch published it.
Peter Lynch Fair Value CalculatorOpen in Stock Valuation Studio →Twelve Growers in Lynch Territory
Every tile opens Stock Valuation Studio already set on the Peter Lynch fair value model. The link sets the model only; enter the ticker in the Studio to run that company through it.