What is Price Earnings Growth (PEG) Ratio?

The Price Earnings Growth (PEG) ratio is a tool investors use to determine a stock’s valuation by considering both its price-to-earnings (P/E) ratio and its future growth prospects.

While the P/E ratio tells us how much investors are willing to pay for each dollar of earnings, the PEG ratio adjusts for the company’s expected growth rate, offering a clearer view of whether a stock is overvalued or undervalued.

How is it Calculated?

The formula for PEG is:

PEG = (P/E Ratio) / Annual Earnings Growth Rate

Example:
If a company has a P/E ratio of 20 and an expected earnings growth rate of 10%, the PEG ratio would be:

PEG = 20 / 10 = 2

Why is PEG Important?

• Growth Consideration: PEG helps investors identify if a stock’s price justifies its expected growth. A PEG of 1 is typically seen as “fair value,” less than 1 as “undervalued,” and above 1 as “overvalued”
• Balanced Analysis: Unlike P/E, which only looks at price and earnings, PEG factors in the future growth rate, making it more comprehensive

Using PEG with Other Ratios

• P/E Ratio: While P/E shows valuation, PEG adds growth to the equation
• Return on Equity (RoE) or Return on Assets (RoA): Combining PEG with these ratios helps assess profitability alongside growth

By understanding the PEG ratio in conjunction with other metrics, investors can make more informed decisions about whether a stock is worth investing in.

Hope you find it helpful

All the best for your investment journey

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