Price Earnings Growth Ratio Analysis

See Also:
Financial Ratios
Price Earnings Ratio
Compound Annual Growth Rate (CAGR)

Price Earnings Growth Ratio Analysis Definition

Price earnings growth ratio (PEG ratio) expresses the relationship among current stock price, a company’s earning per share, and earnings expected future growth. Similar to the Price earnings ratio, the lower the PEG, the more undervalued the stock is.

Price Earnings Growth Ratio Formula

Use the following formula to calculate price earnings growth ratio:

Price to sales ratio = Price per earnings ÷ Annual EPS growth

Calculation

Calculate the annual growth rate of earning for a company by the average annual growth rate over the past 5 years excluding extraordinary items.
For example, a company has a P/E of 20 and is estimated its earnings will grow 20% annually.

PEG ratio = 20 / 20 = 1

Applications

PEG is an indicator of a stock’s potential market value. So, use it to discover stocks with high growth potential while trading at a premium. In general, the value of 1 is considered a sign of good value. However, different industries trade at different PEGs. Furthermore, it is always better to compare a company to its peers group to get more useful information. The weakness of PEG ratio is that it may provide limited information since it relies heavily on earnings estimates.