![]() ![]() Growing companies can be more volatile: Companies that are growing rapidly are often more likely to miss investor expectations or stumble.For example, a stock with stable earnings and a P/E of 4x but just 1% growth will yield a relatively high PEG of 4x, despite that most investors would perceive a P/E of 4x to be highly undervalued and attractive. Not meaningful for low growth stocks: While a PEG ratio may be useful in assessing stocks with higher growth rates, those with low growth do not at all fit well into this measure.If there's a hiccup in the growth rate, a previous PEG measure may prove to be inadequate. Earnings might not continue to grow at the same rate: The PEG ratio assumes that earnings growth will remain constant for the foreseeable future.More meaningful than P/E ratio: A PEG ratio gives you a better understanding of a company's potential future value.Low PEG ratio stocks may yield faster declining P/E ratios: A reasonably high P/E stock may not look atractive right now, but if the PEG is low, and the company achieves growth expectations, the future P/E may look quite affordable using the current stock price.Offers investors an extra dimension in comparing stocks: PEG ratios help investors compare stocks that are growing at different rates. ![]() Benefits & Limitations of the PEG Ratio Pros of PEG In the above example, while Acme cars appears to have a lower P/E ratio (20x, versus 25x for Beta), Beta actually carries the more attractive PEG ratio, however, due to its higher growth rate. Price / Earnings ratio = $50 / $2 = 25x.Price / Earnings ratio = $100 / $5 = 20x.Two different companies sell cars: Acme Cars has a share price of $100 and earnings per share of $5 and earnings growth 15%, while Beta Cars has a share price of $50 and earnings per share of $2 and growth of 25%. Here is an example of how comparing the PEG ratio of two companies can be useful in understanding the company's value better. PEG Ratio Equation (Seeking Alpha) Price/Earnings Growth Examples Price Earnings Growth Ratio (PEG) = Price Earnings Ratio (P/E) / Earnings Per Share Growth Rate Just divide the price/earnings ratio by the current (or forecasted) earnings per share growth rate. The formula for calculating the PEG ratio is simple. Tip: There are online calculators that help determine the PEG ratio of a company. The PEG ratio includes a dimension that the P/E ratio leaves out, helping investors incorporate growth information into the valuation assessment. For example, if the stock mentioned above grew 12% in the last year, its PEG ratio would be 1.33x (=16 / 12). That means that its share price is 16x its earnings.Ī PEG ratio is reached by taking the P/E ratio and then dividing it by a company's growth rate over a specific period of time. For example, if a stock earns $1.25 per share and has a stock price of $20 per share then the company's P/E ratio is 16x. This is done to determine what the ratio is between a company's annual earnings and its stock price. The P/E ratio of a company is calculated by taking a stock's price per share and dividing it by its annual earnings per share. High-growth companies are more likely to be volatile and have inconsistent earnings. Tip: A stock with a low PEG ratio might not always be a better choice. Investors should be mindful that no single valuation metric is a foolproof method for identifying undervalued stocks. However, if two companies have the same price-to-earnings ratio but one company is experiencing 40% growth versus 10% growth for the other, the company with the higher growth by most assessments might be the more attractive investment.ĭividing a stock's P/E ratio by the company's growth rate helps investors incorporate expected future earnings into a measurable valuatio ratio. The Price/Earnings-To-Growth ((PEG ratio)) is a financial metric that builds upon the price-to-earnings ratio (P/E ratio) to help investor assess the valuation of profitable growth stocks.Ī company's price-to-earnings ratio is simply the price of its stock divided by the company's earnings per share. Ijeab/iStock via Getty Images Price/Earnings-To-Growth Ratio Meaning ![]()
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