The ins and outs of the price earnings growth (PEG) ratio

Fsp Invest, 20 Nov. 2013

Tags: peg, peg ratio, price earnings growth ratio, what is the peg, what is the peg ratio, how to calculate the peg ratio, investing, fundamental analysis, financial ratio,

The price earnings (PE) ratio is one of the most commonly used financial ratios. But, if a company’s PE starts to look on the high side, this can put some investors off as expectation are high for the company. So that’s where the price earnings growth (PEG) ratio comes in. Read on to discover the ins and outs of the price earnings growth (PEG) ratio…

The price earnings (PE) ratio is the current share price dividend by the earnings per share, Gareth Stokes in Fear, Greed and the Stock Market explains…

If you compare a company’s PE ratio to others in its sector, you can get an idea of whether a company is overpriced or undervalued.

But a high PE shouldn’t put you off. It’s not always a negative indicator.

Often a company has a high ratio because analysts expect earnings for the coming year to be really good. And the market has already factored such expectation into the price.

So to get over this hurdle, analysts created a new ratio called the price earnings growth (PEG) ratio. This ratio includes growth expectations.

How to calculate the PEG ratio

To calculate the PEG ratio, you need to do the following:

Simply take a company’s PE ratio and divide this by the earnings growth for the coming year.

PEG = (current share price/earnings per share)/expected earnings growth

Let’s run through an example…

Company ABC has a current PE of 20 times. Analysts expect that earnings will grow 50% over the coming year.

So to calculate the PEG, you divide the PE by the earnings growth (20/50). This gives you 0.4 times.

When you calculate PEG, the lower the PEG value, the better.

A PEG of 1 means the market’s effectively pricing in one year’s worth of future growth. So you want to find company’s where the PEG is less than 1 and the company achieves higher than expected growth in earnings per share.

High PEGs can indicate the market may be overpricing the profit growth the company is likely to achieve.

So there you have it, the ins and outs of the price earnings growth (PEG) ratio.

Related QA

d.c.heger asked:
MY QUESTION IS – I bought Bitcoin & Etherium some time ago – at first they grew nicely but now they are lower than what I paid for them. Should I [read more]
Published at 04 Apr. 2018 in: Investing 5 shares due to rocket 1 Answer
kavesh.maharaj.73 asked:
Hi Josh. I would like some advice on TFSA. I can get an interest rate of 7.8% nominal at a bank if I invest the R33k upfront in a fixed deposit [read more]
Published at 19 Mar. 2018 in: Investing Tax free savings vehicle 2 answers
kavesh.maharaj.73 asked:
Hi Josh Quantum wants to buy back shares from shall investors at what I think is a low price of around R3.86. You tipped the share in February [read more]
Published at 14 Mar. 2018 in: Investing Real wealth 5 answers
elizastrydom asked:
Hi Timon I am interested in registering for your Red Hot Storm Trader service. I am already a Red Hot Penny Shares investor. My question is [read more]
Published at 28 Feb. 2018 in: Investing Trading platform and broker 1 Answer
ManuE asked:
I have an interest in investing in Bitcoin, I just don't know how. If I buy Bitcoin with R15 000, how much can make (Return On Investment)? [read more]
Published at 25 Feb. 2018 in: Investing Investment 1 Answer

Related articles:




Youtube Twitter Facebook

Connect with us:    

  • Accelerated Investor
  • Accessories