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PEG Ratio

Price-to-Earnings to Growth Ratio

PEG ratio is quiet popular among retail investors, however professionals do not use it often because of this ratio subjectivity. PEG ratio shows how expensive is stock compared to earnings and growth of earnings.

PEG ratio calculation:

PEG = (P/E ratio) / Annual growth of earnings per share

Example: P/E is 15 and the annual growth rate is 10%.

PEG = 15 / 10 = 1.5

PEG ratio isn’t much academic and there is no exact definition about the growth scope. However, 5 years is a period mostly used in DCF forecasts, and probably such period would be the best for PEG ratio growth expectations.

PEG interpretation:

The lower PEG ratio is the better. It is good if PEG ratio is lower than 1, however, it mostly depends on trustworthiness of forecasts and market conditions. Also in emerging markets PEG is expected to be lower than in developed markets.

If you want to find cheap stocks that would be good investments, you have to calculate more valuation multiples, but you can’t rely on one ratio (P/E) when making investment decision.

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