0 XP   0   0   0

Price earning to growth ratio

Measures the predicted future growth of the company.

PEG ratio is a more advanced ratio and uses the PE ratio and expected annual EPS growth. The only ratio that considers future growth is the PEG ratio. All other ratio’s only look at the past. 

How to use PEG ratio

Penke

A PEG ratio of 1 means the market price of the stock and the expected future earnings are on par.

  • Lower is better.
  • A PEG ratio above 2 is considered overpriced.
  • Can be very different between industries.
  • Can be used to compare companies.
PEG Ratio Meaning
0.5 You can buy the stock cheap based on future growth
1 You pay a fair price based on future growth
2 The stock is overpriced based on future growth

Why do investors use PEG ratio in their analysis

The PEG ratio tells investors if a stock has a fair price, is cheap or is overpriced based on its future earnings. If the PEG ratio is low that might be an opportunity to look further in the details of .

The three steps every investor should look at:

  • What is the current PEG ratio?
  • How does it compare to the industry?
  • What is the trend?

Things to be aware of

  • Only compare with other companies in the same industry.
  • It’s based on future predictions which may not come true at all.
  • Always check how many years are used for predicting future earnings. Some sites/screeners use a one year forecast and others use multiple years.
  • PEG ratio is unreliable if the forecast is based on many years in the future.
  • In general (when looking at historic data) a business can only maintain a 5-10% growth over many years.
  • Other sites might use different settings (TTM vs YOY) or longer time periods. You should not compare PEG ratios to different websites unless the calculation is exactly the same.

How to calculate PEG ratio

PEG ratio = PE ratio \ expected annual EPS growth

Real life example

Real life example of Tesla. You need the following data to determine the PEG ratio:

The EPS is calculated as follows:

EPS = net income \ outstanding shares. 

The net income can be found on the income statement (make sure you select yearly in the top). Also, make sure you always look at net income applicable to common shares. This means that preffered dividends on stocks are deducted:

Common outstanding shares

The amount of outstanding shares can be found on the balance sheet report:

  • Year 2020: $690,000 / 3,465,000 = 0.19 EPS
  • Year 2021: $5,519,000  / 3,465,000 = 1.59 EPS

To calculate the expected annual EPS growth:

  • (EPS latest year / EPS year before) - 1
  • (1.59 / 0.19) - 1 = 730%

The average growth from 2020 to 2021 was 730%. To calculate the PEG ratio:

  • PEG ratio = PE ratio / expected annual EPS growth
  • 717 / 730 = 0.98

Comments

Join the conversation.

Leave a comment

Stay informed with my latest content.

Subscribe to my newsletter and receive an email as soon as I add content to PenkeTrading.com.


By clicking Register, you agree to the General Terms and Conditions.
Penke's Market Notifications
AAGH.PINK
23 minutes ago

I found you a STOCH Bullish Reversal Divergence on the daily chart of AAGH.PINK.

AAGH.PINK Daily Candlestick Chart
WSNAF.OTCQB
26 minutes ago

I found you a STOCH Bearish Reversal Divergence on the daily chart of WSNAF.OTCQB.

WSNAF.OTCQB Daily Candlestick Chart
XINT.ST
1 hour ago

I found you a Bearish Three Line Strike Candle Pattern on the daily chart of XINT.ST.

XINT.ST Daily Candlestick Chart
ELAN.NYSE
1 hour ago

I found you a STOCH Bullish Reversal Divergence on the daily chart of ELAN.NYSE.

ELAN.NYSE Daily Candlestick Chart
EIGR.NASDAQ
1 hour ago

I found you a STOCH Bullish Reversal Divergence on the daily chart of EIGR.NASDAQ.

EIGR.NASDAQ Daily Candlestick Chart
EFSC.NASDAQ
1 hour ago

I found you a STOCH Bullish Reversal Divergence on the daily chart of EFSC.NASDAQ.

EFSC.NASDAQ Daily Candlestick Chart
DZZ.NYSE ARC
1 hour ago

I found you a STOCH Bullish Reversal Divergence on the daily chart of DZZ.NYSE ARC.

DZZ.NYSE ARC Daily Candlestick Chart
CANS.V
1 hour ago

I found you a Overbought RSI (Relative Strength Index) on the daily chart of CANS.V.

CANS.V Daily Candlestick Chart
DRMA.NASDAQ
1 hour ago

I found you a RSI Bullish Hidden Divergence on the daily chart of DRMA.NASDAQ.

DRMA.NASDAQ Daily Candlestick Chart
DRFS.PINK
1 hour ago

I found you a STOCH Bullish Reversal Divergence on the daily chart of DRFS.PINK.

DRFS.PINK Daily Candlestick Chart
DISH.NASDAQ
1 hour ago

I found you a STOCH Bearish Hidden Divergence on the daily chart of DISH.NASDAQ.

DISH.NASDAQ Daily Candlestick Chart
EDGE.TO
2 hours ago

I found you a Golden Cross on the daily chart of EDGE.TO.

EDGE.TO Daily Candlestick Chart
ENRG.V
2 hours ago

I found you a STOCH Bullish Reversal Divergence on the daily chart of ENRG.V.

ENRG.V Daily Candlestick Chart
EFR.TO
2 hours ago

I found you a STOCH Bullish Reversal Divergence on the daily chart of EFR.TO.

EFR.TO Daily Candlestick Chart
DML.TO
2 hours ago

I found you a STOCH Bullish Reversal Divergence on the daily chart of DML.TO.

DML.TO Daily Candlestick Chart
DOO.TO
2 hours ago

I found you a Bullish Three Line Strike Candle Pattern on the daily chart of DOO.TO.

DOO.TO Daily Candlestick Chart
CIX.TO
2 hours ago

I found you a STOCH Bullish Reversal Divergence on the daily chart of CIX.TO.

CIX.TO Daily Candlestick Chart
BYL.TO
2 hours ago

I found you a STOCH Bearish Hidden Divergence on the daily chart of BYL.TO.

BYL.TO Daily Candlestick Chart
3LLV.PA
2 hours ago

I found you a MACD Bearish Reversal Divergence on the daily chart of 3LLV.PA.

3LLV.PA Daily Candlestick Chart
MAC.LSE
3 hours ago

I found you a STOCH Bearish Hidden Divergence on the daily chart of MAC.LSE.

MAC.LSE Daily Candlestick Chart
KCT.LSE
3 hours ago

I found you a STOCH Bullish Reversal Divergence on the daily chart of KCT.LSE.

KCT.LSE Daily Candlestick Chart
S5FI.INDX
3 hours ago

I found you a STOCH Bullish Reversal Divergence on the daily chart of S5FI.INDX.

S5FI.INDX Daily Candlestick Chart
MMFI.INDX
3 hours ago

I found you a STOCH Bullish Reversal Divergence on the daily chart of MMFI.INDX.

MMFI.INDX Daily Candlestick Chart
STU.V
4 hours ago

I found you a STOCH Bearish Reversal Divergence on the daily chart of STU.V.

STU.V Daily Candlestick Chart