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.
For example, a company has a P/E of 20 and is estimated its earnings will grow 20% annually.
PEG ratio = 20 / 20 = 1
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.
[box]Strategic CFO Lab Member Extra
Access your Flash Report Execution Plan in SCFO Lab. The step-by-step plan to create a dashboard to measure productivity, profitability, and liquidity of your company.
Click here to access your Execution Plan. Not a Lab Member?
Click here to learn more about SCFO Labs[/box]