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.

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