In an earlier Masterclass we covered the PE ratio – Price to Earnings Ratio. A variation further to PE is the growth of the PE – ie PE growth. This takes into account the stock’s value while considering the company’s earnings per share growth.
It is sometimes favoured over the price-earnings ratio because it also accounts for growth. It is similar to the P/E ratio in that a lower PEG means that the stock is more undervalued. One should keep in mind that the numbers used in the calculation are considered projected and therefore are only estimates. Also, there are many variations using earnings from different time periods (e.g., one year versus five years), and whether the annual growth is projected or (future prediction) or trailing (past history), so you need to know the exact method and time-frame the source is using.
As an example, consider two companies:
The first has P/E ratio 50 and annual earnings growth rate 20 = PEG ratio of 50/20 = 2.5
The other has P/E ratio 15 with annual earnings growth rate 10 = PEG ratio of 15/10 = 1.5
Comparing the two, first doesn’t have the growth rate to justify the higher PE and the stock price is considered over-valued.
If you use future earnings figures you are looking at projected PEG.
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