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PEG ratio

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What does it mean?

The Price/Earnings to Growth (PEG) Ratio adds expected growth to the the Price/Earning ratio equation as follows:

PEG Ratio = P/E Ratio/Earnings per Share (EPS) Growth
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TheBull says...

The EPS growth number is provided by the company and is their forecast of how much additional earnings they anticipate in the coming reporting period. Although nowhere near as widely used as the basic P/E Ratio, many financial experts feel the PEG gives a better measure of whether the share price is undervalued or overvalued.

A PEG under 1 means the shares have the potential to beat the market’s current valuation of the shares. High PEG Ratios are clear indications the shares are currently overvalued.

The company supplies the projected annual growth rate and this is one of the drawbacks of this ratio – it is an estimate from a less than objective party. However, few companies overestimate growth rates as their shares can be severely punished if they miss the target.

Peter Lynch popularized this ratio and its meaning – a fairly priced share is one where the P/E ratio equals its growth rate. It follows that if a PEG of 1.0 represents a fairly priced share; anything under 1.0 represents a potentially undervalued share and a buying opportunity.

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