Looking to unearth undervalued shares? Use the PEG ratio…

Julie Brownlee, Fsp Invest, 16 Nov. 2015

Tags: peg ratio, what is the peg ratio, how to use the peg ratio, undervalued shares, investing, investing in shares,

If you’re looking to find undervalued shares, you have a number of tools at your disposal to help you.

One of these tools is the PEG ratio.

So what is the PEG ratio? And how can you use it to find undervalued shares?

Read on to find out…

What is the PEG ratio?

The PEG ratio compares a company’s PE ratio with its expected growth in earnings per share (EPS). A company’s PE ratio is its current share price dividend by its EPS.

To calculate the PEG ratio, you take the PE ratio and divide it by expected annual earnings growth.

Many investors prefer using the PEG ratio rather than the PE ratio as they believe it’s a better way to weigh up a company’s value than concentrating on share price and earnings alone.

How to use the PEG ratio to find undervalued shares

If you calculate the PEG ratio for a company and it comes out less than one, the share could be undervalued.

This definitely warrants further investigation.

The PEG ratio can also be useful to compare companies in the same sector. It can give you an idea of how they measure up against each other.

For example, Company A has a PE ratio of 15.It is forecast that its earnings will grow 20%. This gives Company A a PEG ratio of 0.75 (15/20).

Company B also has a PE ratio of 15. But its earnings are forecast to grow 5%. This gives Company B a PEG ratio of 3 (15/5).

As you can see, Company A looks like it’s better value as an investment.

So there you have it. How to use the PEG ratio to unearth undervalued shares.

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