PEG Ratio
What is PEG?
PEG is another important metric used to help determine a stock's value. PEG takes into account the price/earnings ratio, as well as the growth of earnings.
How is PEG calculated?
PEG is calculated using the following formula:
(Price / Earnings Ratio) / (Annual EPS Growth)
Why is it important?
It is a good indicator of the potential value of a stock. It accounts for growth, and a lower PEG is better than a higher one. As a result, when you are comparing two similar companies in the same industry, differences in PEG may be an important factor in your decision.
PEG Values
The actual value of the PEG is very important and significant in the context of a company's valuation. Because it compares a stock's P/E to its EPS growth rate, if the PEG is equal to 1 that means that the company is fairly valued when considering its future growth prospects. If the PEG is greater than 1, that means that the company is overvalued by the market for some reason, and if the PEG is less than 1 that means that the company is undervalued by the market for some reason. The reason could be very legitimate, such as forecasted lower or higher earnings in the next quarter, so never use PEG in isolation without consulting other metrics.