Understanding the PEG ratio

If there are two identical companies which are similar in every regard except that one company is projected to grow at a higher rate than the other, then isn't it natural for a rational investor to pay more for the high-growth company? This analogy underscores an important shortcoming of the P/E metric i.e it ignores expected growth rates. The P/E ratio values all companies based only on its historical earnings and this is inappropriate for comparing companies which are in different stages of their life cycles. If two companies have the same P/E ratio, it is likely that many people will reach a very cursory (but incorrect) conclusion that both these companies are trading at the same relative valuation. But we know that a declining company is not likely

This article was originally published on November 28, 2020.