In our previous Masterclass we covered the PE ratio – Price to Earnings Ratio and how it works.
A variation of PE is the growth of the PE – ie PEG. This takes into account the stock’s value (PE) while considering the company’s earnings per share Growth.
PEG is sometimes more popular than the PE price-earnings ratio because it also accounts for growth of earnings.
The similarity to the P/E ratio occurs in that lower the PEG means that the stock is more undervalued.
But keep in mind that the numbers used in the calculation are often 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 (a 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 2 companies
The first has P/E ratio 20 and annual earnings growth rate 20 = PEG ratio of 20/20 = 1.0
The other has P/E ratio 15 with annual earnings growth rate 10 = PEG ratio of 15/10 = 1.5
Now, comparing the two, the 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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