Price/Earnings to Growth Ratio (PEG) Thursday, June 21, 2007
Posted by ei-forum in Understanding Ratios.trackback
The PEG ratio is a variation of the P/E ratio. It compares a company’s P/E to its earnings growth and is increasingly used due to the fact that it factors in growth.
The PEG ratio is calculated by dividing the current share price by the Earnings per Share (EPS), divided by the Annual Earnings per Share Growth.
Like the P/E ratio, a lower PEG indicates that the stock may be undervalued. If the PEG is equal to 1, it means that the stock is priced at a level exactly matching the Earnings Growth. Therefore, if it is under 1, it may be an indication that it is undervalued and overvalued if over 1.
The main thing to keep in mind when examining a PEG ratio is what periods were used for the calculation. Growth rates, for example, could be calculated based on historical or projected growth and could be for different durations (i.e. 1 year vs. 5 years). The same is true of earnings, which could be historical or projected.
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