The PEG Ratio The PEG ratio is a relatively young financial ratio, which is used to give insight on whether a company is undervalued or overvalued. The PEG ratio picks up where the P/E ratio left off. It combines the P/E ratio of a company with the expected growth. Trailing P/E is used. (Trailing P/E = Stock price / earnings per share in last 4 quarters) Growth estimates
can be found on many financial websites.
This can come in very handy, as companies with a high expected growth tend to have a higher P/E ratio. But by using the PEG ratio all stocks can be compared without having to think about their earnings growth. The higher the PEG the higher the company is valued. In general stocks having a PEG ratio below 1 are seen as undervalued, and stocks with a PEG ratio above 2 as overvalued. Example of a PEG calculation Google Inc. (GOOG) currently has a trailing P/E of 18.8. The consensus among analysts is that earnings with grow by 17.5% this year, giving a PEG ratio of 1.07.
This implies that GOOG is reasonably valued, although since it is close to 1 I’d say the stock still has good appreciation potential. |
