Projected Earnings Growth Rate - PEG Ratio
The price/earnings-to-growth ratio, or the PEG ratio, is a metric that helps investors value a stock by taking into account a company’s market price, its earnings and its future growth prospects.
The PEG ratio is considered to be an indicator of a stock's Potential value, and similar to the P/E ratio, a lower PEG may indicate that a stock is undervalued.
The Ratio used to determine to compare companies and see which stock might be the better choice for an investor's needs.
The Calculation is as follows:
PEG Ratio = (Price / EPS) / EPS Growth.
Where EPS = Earnings Per Share
Example Data Stock A and Stock B:
Stock A:
Price per share = Rs.46
EPS this year = Rs.2.09
EPS last year = Rs.1.74
Stock B
Price per share = Rs.80
EPS this year = Rs.2.67
EPS last year = Rs.1.78
Given this information, the following data can be calculated for each company.
Stock A
P/E ratio = Rs.46 / Rs.2.09 = 22
Earnings growth rate = (Rs.2.09 / Rs.1.74) - 1 = 20%
PEG ratio = 22 / 20 = 1.1
Stock B
P/E ratio = Rs.80 / Rs.2.67 = 30
Earnings growth rate = (Rs.2.67 / Rs.1.78) - 1 = 50%
PEG ratio = 30 / 50 = 0.6
A PEG ratio of 1.0 or lower suggests a stock is fairly priced or even undervalued. A PEG ratio above 1.0 suggests a stock is overvalued.
