Definition of PEG Ratio?
PEG is known as Price Earning to Growth. This ratio is used to calculate the stock-based value on the current earning and the company’s potential future growth. Peg ratio explanation will help you understand well.
Definition: What is the Price/Earnings to Growth Ratio?
You can consider this as an improved P/E ratio because it factors in the growth of the company by dividing the P/E by the annual growth rate. P/E tells the company performance for the future and about the stock might look attractive. The growth pattern of the company, in reality, might be stagnant. When we consider P/E, then the stock might be a bad buy actually.
P/E is the improved version of PEG. For different reasons, most of the investors use both calculations. Both the matric give the information, that the investment is good or not. For the best calculation, you need to look at both metrics for the investment information.
What is the Formula of the PEG ratio?
PEG ratio formula can be calculated by dividing the price-earnings by the annual earning per share growth rate.
PEG Ratio = (P/E)/(Annual per share growth rate)
The above equation is so simple for calculation. The numerator of this equation is calculated by dividing the market price per share by the earning price per share.
Peg Ratio formula analysis
PEG ratio used for what?
On the growth pattern of business in its industry, the PEG ratio figure out that the stock price is overvalued or undervalued. It is used to find the actual worth of the company. it does not consider that what stock is currently trading for. A worthless company may have a high stock price because stock prices depend on the demand, speculation, and expectation of the investors.
PEG valued the company it produces and adjusts it for the growth of the company. For the indication of a good or bad investment, there are no specific numbers because it greatly varies among the industries. If the PEG ratio is less than 1 then the company drowned because the stock price of that company is undervalued.
For a better understanding of the PEG calculation now we take the example of the PEG ratio.
Peg Ration Example
Pharm Inc is a Pharmaceutical company. To cure the disease this company start research for new medicines. This company has 10 PE. It has expected EPS growth for the next 5 years is over 12 per cent. this company calculate the PEG as
83.33 = 10/12%
So PEG for the above company is 0.83 which indicate the low stock price of the company. It is a good investment by Pharm Inc. Investors need to compare the metrics of this company with other companies’ metrics under the same industry for investment.
You can check more definitions and formulas by visiting Envestopedia.