Price earning to growth ratio
PEG ratio is a more advanced ratio and uses the PE ratio and expected annual EPS (earnings per share) 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
- Lower is better
- A PEG ratio above 2 is considered overpriced
- Can be very different between industries
- Can be used to compare companies
|0.5||You can buy the stock cheap|
|1||You pay a fair price|
|2.5||The stock is overpriced|
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.
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 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