- The price-to-earnings-to-growth (PEG) ratio is a formula that compares a stock's price to its earnings and rate of growth.
- To calculate the PEG ratio of a given stock, divide the P/E ratio by the EPS growth rate.
- This formula can help to find stocks that are priced below their value (or avoid stocks that are priced too high for their value).
- Dividends will throw off the PEG ratio, so there is a slightly altered formula you can use for stocks that issue dividends.
Is PEG ratio the best indicator to pick a stock?
There is no best indicator to pick a stock. Personally, I only buy companies with a relatively low PEG (less than 1). PEG, P/E, and forward P/E are all things to look at when assessing the earnings potential of a company. For instance, a stock that I would consider buying would have the following attributes, among others:
What is a good PEG ratio for a stock?
What Is a Good PEG Ratio? As a general rule, a PEG ratio of 1.0 or lower suggests a stock is fairly priced or even undervalued. A PEG ratio above 1.0 suggests a stock is overvalued.
What companies have low PEG ratios?
7 Growth-at-a-Reasonable-Price (GARP) Stocks To Buy
- GARP Stocks To Buy: Qualcomm (QCOM)
- PulteGroup (PHM)
- Ameriprise Financial (AMP)
- NVR, Inc (NVR)
- T Rowe Price (TROW)
- eBay (EBAY)
- KLA Corp (KLAC)
What's considered a good PEG ratio?
The PEG ratio is a shortcut for determining how cheap a stock is relative to its growth. The lower the PEG, the cheaper a stock is trading (relative to its earnings and growth in earnings). Generally, any PEG below 1 is considered very good. This means you're getting a discount on the company compared to its growth rate.
How do you calculate PEG ratio in Excel?
PEG Ratio = (Price/EPS) / EPS Growth Thus, in order to calculate PEG Ratio, Price Earnings Ratio is divided by EPS Growth, wherein Price Earnings Ratio is calculated by dividing the price of the share by earnings per share.
How do you calculate PEG ratio in Google Sheets?
PEG Ratio Formula = P/E Ratio / Earnings Growth Rate Forward PEG.
What is a good PEG ratio for stocks?
PEG ratios higher than 1.0 are generally considered unfavorable, suggesting a stock is overvalued. Conversely, ratios lower than 1.0 are considered better, indicating a stock is undervalued.
How do I calculate the PEG ratio?
The price-to-earnings-to-growth (PEG) ratio is a formula that compares a stock's price to its earnings and rate of growth. To calculate the PEG ratio of a given stock, divide the P/E ratio by the EPS growth rate.
What is PEG ratio example?
The math behind the PEG ratio is straightforward. One simply divides a company's P/E ratio by its expected rate of growth. A company with a P/E ratio of 20 and an expected growth rate of 10%, for example, would have a PEG ratio of 2 (20 / 10).
What does peg tell you about a stock?
The PEG ratio enhances the P/E ratio by adding in expected earnings growth into the calculation. The PEG ratio is considered to be an indicator of a stock's true value, and similar to the P/E ratio, a lower PEG may indicate that a stock is undervalued.
How accurate is PEG ratio?
PEG ratios are actually based on mathematics, but shockingly, the PEG ratio is only accurate under a very specific set of circumstances that are rarely ever met in the investment market place.
What is the PEG of Tesla?
Valuation Measures 4As of Date: 5/20/2022 Current12/31/2021Trailing P/E90.08343.11Forward P/E55.87121.95PEG Ratio (5 yr expected)1.552.67Price/Sales (ttm)12.1225.635 more rows
What is a good 5 year PEG?
A ratio between 0.5 and less than 1 is considered good, meaning the stock may be undervalued given its growth profile. A ratio less than 0.5 is considered to be excellent.
What is Apple's PEG ratio?
ValuationCalendar20122017Price/Forward Earnings8.9014.90PEG Ratio0.481.40Earnings Yield %8.285.44Enterprise Value (Bil)459.88902.387 more rows
What is Amazon's PEG ratio?
Valuation Measures 4As of Date: 6/15/2022 Current3/31/2022Trailing P/E51.9450.30Forward P/E59.1757.14PEG Ratio (5 yr expected)3.702.96Price/Sales (ttm)2.323.575 more rows
What is the EPS formula?
Earnings per share is calculated by dividing the company's total earnings by the total number of shares outstanding. The formula is simple: EPS = Total Earnings / Outstanding Shares. Total earnings is the same as net income on the income statement. It is also referred to as profit.
Does a PEG ratio tell you anything?
Remember, PEG ratios don't tell you anything about the future prospects of a company (i.e., a company sure to go bankrupt will likely have a very low PEG ratio, but that doesn't mean it's a good investment). The offers that appear in this table are from partnerships from which Investopedia receives compensation.
Is a PEG ratio good?
Generally speaking, however, a PEG ratio of less than 1 suggests a good investment, while a ratio over 1 suggests less of a good deal.
What is the PEG ratio?
The PEG ratio is used to determine a stock's value while also factoring in the company's expected earnings growth, and it is thought to provide a more complete picture than the more standard P/E ratio.
What does a lower PEG mean?
The PEG ratio is considered to be an indicator of a stock's true value, and similar to the P/E ratio, a lower PEG may indicate that a stock is undervalued.
Is a PEG of 1.0 overvalued?
When a company's PEG exceeds 1.0, it's considered overvalued while a stock with a PEG of less than 1.0 is considered undervalued. 2 .
Example of the PEG Ratio Calculation
Using the example shown in the table at the top of this guide, there are three companies we can compare – Fast Co, Moderate Co, and Slow Co.
Download the Free Template
Enter your name and email in the form below and download the free template now!
How to Interpret the PEG Ratio
Based on the above examples, Fast Co has the highest P/E ratio at 27-times, and on the surface, it may look expensive. Slow Co, on the other hand, has a very low PE ratio of only 5.6-times, which may cause investors to think it’s cheap.
Risks of Using the PEG Ratio
While the ratio helps adjust for growth over a period of time, it typically only takes into account a short time period, such as 1-3 years. For this reason, one or two years of high growth may overstate the benefit of buying the faster-growing company. The opposite is true with Slow Co.
Financial Modeling to Value a Company
Using the PEG ratio formula can be useful, but ultimately financial modeling is the best way to account for all aspects of a company’s growth profile when performing a valuation.
Additional resources
This has been a guide to adjusting the traditional PE ratio by dividing by a company’s growth rate in earnings per share to arrive at the PEG ratio.
What is the PEG ratio?
The PEG ratio tells investors the relationship between a stock's current stock price, earnings per share and future earnings growth. The PEG is the byproduct of the P/E ratio. Stand-alone, the P/E ratio is a valuation metric that measures a company's stock price compared to its earnings per share, but one of its shortcomings is it doesn't consider ...
What is the PEG formula?
The PEG formula is the P/E ratio (the share price divided by earnings per share), divided by the expected earnings growth rate. The benchmark value of 1 is used to assess the valuation of a stock's PEG. As a general rule of thumb, a PEG of 1 tends to be appropriately priced. If the PEG is less than 1, it's said to be undervalued because investors ...
Why is peg important?
PEG is a popular valuation ratio that's easy to use. This ratio allows value investors to do a comparative check on stocks within the same industry that have varying rates of growth to determine which investment fits their strategy.
Why is a PEG undervalued?
If the PEG is less than 1, it's said to be undervalued because investors can gain from a stock's projected earnings by buying more shares for less. Conversely, if the PEG is more than 1, the stock is said to be overvalued and investors may be purchasing it at a higher price for a company's future earnings growth.
Why is PEG considered a holistic ratio?
The PEG is considered a more holistic ratio compared to P/E because PEG factors in both the P/E and how fast a company can grow its earnings. A low PEG means the stock may be undervalued. If the PEG is high, then the stock might be overvalued compared to its growth rate.
Can you use a single ratio to evaluate a stock?
A single ratio alone can't give investors the full picture of a stock's value. But the PEG ratio can be a starting guide in your stock evaluation process, so investors need to make sure they're using it with the utmost accuracy: PEG ratio versus P/E ratio. How to use PEG. How to calculate PEG.
Can you cross-sector compare a PEG?
Investors can make an accurate reading of a stock's PEG when compared with other similar stocks in the same industry. It wouldn't be suitable to do a cross-sector comparison because a low PEG in one sector could represent a favorable value while a low PEG in another sector could mean something different.
How to calculate PEG ratio?
To calculate the PEG, an investor must first calculate the P/E. To do that, take the share price and divide it by the earnings per share ( EPS ). Once you have the P/E, you simply divide that by the growth in earnings per share to arrive at the PEG ratio. 2 .
What is a peg ratio?
What Is the PEG Ratio? The PEG ratio is a form of the P/E ratio, which tells investors how much Wall Street is willing to pay for every $1 in company earnings. 1 In general, a lower P/E is considered better because it suggests that the price is backed up by fundamentals, rather than speculation.
What does it mean when a stock has a low P/E?
If you have a stock with a low P/E, you might logically assume that it is undervalued. However, if the company does not have expectations of significant earnings growth, you may get a high PEG ratio, indicating that you should pass on buying the stock.
Why use conservative growth estimates?
Using the most conservative figure available helps to avoid overpaying for a stock that doesn't deliver on growth expectations. By banking too much on the promise of the future, a stock that would otherwise be worthless might appear to be a great bargain.
Is a high P/E a good investment?
A stock with a high P/E might be viewed as overvalued and not a good investment. Calculating the PEG ratio on that same stock, assuming it has good growth estimates, can actually yield a lower number and indicate that the stock may still be a good buy. The opposite holds true as well.
What is the PEG ratio?
The PEG (or P/E-to-growth) ratio looks at a company's share price relative to its earnings per share (EPS) and projected earnings growth rate. By factoring in a company's future growth, some analysts see the PEG ratio as giving a more complete view of a stock's value, particularly for fast-growing companies.
How to calculate the PEG ratio
To calculate PEG ratio, you first divide the company's share price by its earnings per share, then divide the resulting figure by its EPS growth rate.
What does the PEG ratio tell you?
Typically investors use the PEG ratio to evaluate whether a stock is appropriately priced, undervalued, or overvalued.
PEG ratio example
For example, let's compare the PEG ratios of two semiconductor companies: Advanced Micro Devices and Qualcomm as of mid-January 2022.
What Is The Price/Earnings-To-Growth (PEG) Ratio?
How to Calculate The Peg Ratio
- PEG Ratio=Price/EPSEPS Growthwhere:EPS = The earnings per share\begin{aligned} &\text{PEG Ratio}=\frac{\text{Price/EPS}}{\text{EPS Growth}}\\ &\textbf{where:}\\ &\text{EPS = The earnings per share}\\ \end{aligned}PEG Ratio=EPS GrowthPrice/EPSwhere:EPS = The earnings per share To calcul…
What Does The Price/Earnings-To-Growth Ratio Tell You?
- While a low P/E ratio may make a stock look like a good buy, factoring in the company's growth rate to get the stock's PEG ratiomay tell a different story. The lower the PEG ratio, the more the stock may be undervalued given its future earnings expectations. Adding a company's expected growth into the ratio helps to adjust the result for companies that may have a high growth rate a…
Example of How to Use The Peg Ratio
- The PEG ratio provides useful information to compare companies and see which stock might be the better choice for an investor's needs, as follows. Assume the following data for two hypothetical companies, Company A and Company B: