A:

The price/earnings to growth, or PEG, ratio is a very useful stock valuation measure investors and analysts can use to get a broader assessment of a company's performance and potential than that provided by the more well-known price-to-earnings, or P/E, ratio.

The price-to-earnings ratio gives a good fundamental indication of what investors are currently paying for a company's stock in relation to the company's earnings, by dividing per share market value by per share earnings. One weakness of the P/E ratio, however, is its calculation does not take into account future expected growth of a company. The PEG ratio builds upon the P/E ratio by factoring growth into the equation. It is calculated by dividing the P/E ratio by the projected annual growth percentage for the next five-year period.

The calculation can be done for a longer period of time, but obviously growth projections tend to become less accurate the further out they extend. Factoring in future growth adds an important element to stock valuation since equity investments represent a financial interest in a company's future earnings. The PEG ratio represents a fuller and hopefully more accurate valuation measure than the standard P/E ratio.

Theoretical perfect correlation between market value and projected earnings growth assigns a PEG ratio value of 1 to a stock. PEG ratios higher than 1 are generally considered unfavorable, suggesting a stock is overvalued. Conversely, ratios lower than 1 are considered better, indicating a stock is undervalued. Other factors and evaluations, such as price-to-book ratio, or P/B ratio, are considered by analysts to determine if a stock is genuinely undervalued or if it is more likely the growth estimates used to calculate the PEG ratio are simply inaccurate.

RELATED FAQS
  1. When computing the PEG ratio for a stock, how is a company's earnings growth rate ...

    Remember that the price/earnings to growth ratio (PEG ratio) is simply a given stock's price/earnings ratio (P/E ratio) divided ... Read Answer >>
  2. What is the average price-to-earnings ratio in the banking sector?

    Explore the price/earnings ratio in regard to the banking industry and learn what the average P/E ratio is for most banking ... Read Answer >>
  3. What does the forward p/e indicate about a company?

    Explore the forward price to earnings ratio and learn its significance and how it compares to the traditional price to earnings ... Read Answer >>
Related Articles
  1. Investing

    PEG Ratio Nails Down Value Stocks

    Learn how this simple calculation can help you determine a stock's earnings potential.
  2. Investing

    The 4 basic elements of stock value

    Investors use these four measures to determine a stock's worth. Find out how to use them.
  3. Investing

    Sysco and Other Big Movers In Services

    The market has been slipping so far today. The Nasdaq has fallen 0.3%; the S&P 500 has fallen 0.4%; and the Dow has declined 0.5%. The Services sector (IYC) is currently lagging behind the overall ...
  4. Investing

    5 Must-Have Metrics for Value Investors

    In this article, we outline the 5 ratios that can help value investors find the most undervalued stocks in the market.
  5. Investing

    SXC Health Solutions Corp. (USA) Among the Nasdaq's Biggest Movers

    The market is having a bad day so far: the Nasdaq is trading down 0.3%; the S&P 500 has declined 0.4%; and the Dow has slipped 0.5%. The Nasdaq Composite Index is a capitalization-weighted index, ...
  6. Investing

    How Do I Calculate the Price-Earnings Ratio?

    If Apple is trading at $108.73 per share, and its trailing twelve months' EPS is $6.45, calculate the P/E ratio as...
  7. Investing

    How to Invest Your Excess Cash in Undervalued Securities

    Learn how even small investors can shoot for substantial capital gains by starting to invest their excess cash in undervalued securities.
RELATED TERMS
  1. Price/Earnings To Growth - PEG Ratio

    Price/Earnings to Growth (PEG) is a stock's price to earnings ...
  2. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ...
  3. Forward Price To Earnings - Forward P/E

    A measure of the price-to-earnings ratio (P/E) using forecasted ...
  4. Accounting Ratio

    A way of expressing the relationship between one accounting result ...
  5. P/E 10 Ratio

    The P/E 10 ratio is a valuation measure, generally applied to ...
  6. Operating Ratio

    A ratio that shows the efficiency of a company's management by ...
Hot Definitions
  1. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  2. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  3. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  4. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  6. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
Trading Center