One of the basic limitations of PEG is that even though it does forecast future growth it still only measures that future growth in the context of that moment. It also does not provide a context for the growth number. For example, that growth could be due to a one-time event. Also, when compared with other analysis tools such as a discounted cash flow analysis, the PEG ration tends to undervalue the companies with the highest growth rates.
Another limitation of the PEG ratio is how future growth is calculated. If the company uses projected growth, it may significantly different (and easier to manipulate) than if they were to use historical data.
However, these limitations make the PEG ratio no different than other ratios or metrics. Every investor needs to use more than one measurement tool to get a complete picture of a stock’s valuation. For example, looking at a company’s balance sheet over the course of several quarters can give investors a better look at trends having to do with their revenue growth or free cash flow.