DEFINITION of 'PEG Payback Period'

The PEG payback period is a key ratio that is used to determine the time it would take for an investor to double their money with a stock investment. The price-to-earnings growth payback period is the time it would take for a company's earnings to equal the stock price paid by the investor. A company's PEG ratio is used rather than their price-to-earnings ratio because it is assumed that a company's earnings will grow over time. In theory, the price/earnings to growth ratio helps investors and analyst determine the relative trade-off between the price of a stock, the stock's earnings per share (EPS), and the company's expected growth rate.

BREAKING DOWN 'PEG Payback Period'

The best reason for calculating the PEG payback period is to determine the riskiness of an investment. As a measure of relative riskiness, the PEG payback period's primary benefit is as a measure of liquidity. Liquid investments and securities are generally considered less risky than illiquid variations; all else held constant. Generally the longer the payback period, the riskier an investment becomes. This is because the payback period relies on the assessment of a company's earnings potential. It is harder to predict such potential further into the future, and subsequently, there is a greater risk that those returns will not come to fruition.

Drawbacks of the PEG Ratio

A notable deficiency of the PEG ratio is that it's largely an approximation; a deficiency particularly subject to financial engineering or manipulation. None the less, the PEG ratio and resulting PEG payback period still enjoy widespread use in the financial press and within the analysis and reporting by capital markets strategists.

The growth rate used in the PEG ratio is generally derived in one of two ways. The first method uses a forward-looking growth rate for a company. This number would be an annualized growth rate (i.e., percentage earnings growth per year), usually covering a period of up to five years. The other method uses a trailing growth rate derived from a trailing financial period, such as the last fiscal year or the previous 12 months. A multi-year historical average may also be appropriate. The selection of a forward or trailing growth rate depends on which method is most realistic for future project results. For certain mature businesses, a trailing rate may prove a reliable proxy. For high growth or businesses experiencing an explosive new product, a forward-looking growth rate may be preferred.

RELATED TERMS
  1. Price/Earnings To Growth - PEG ...

    Price/Earnings to Growth (PEG) is a stock's price to earnings ...
  2. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present ...
  3. Currency Peg

    A currency peg is an exchange rate policy that "pegs" a country's ...
  4. Crawling Peg

    A crawling peg is an exchange rate adjustment system whereby ...
  5. Trailing Price-To-Earnings - Trailing ...

    Trailing price-to-earnings (P/E) is is calculated by taking the ...
  6. Rate On Line

    Rate on line is the ratio of premium paid to loss recoverable ...
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

    How To Use The P/E Ratio And PEG To Tell A Stock's Future

    The P/E ratio is used to calculate stock price valuation. However the PEG ratio includes earnings growth and can provide insight as to whether the P/E valuation is justified.
  4. Investing

    How to Find P/E And PEG Ratios

    If calculating the P/E and PEG ratios have you in the dark, these easy calculations should help.
  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

    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 ...
  7. Investing

    Stock Valuations 101: Price to Earnings Ratio

    Understanding stock valuations is essential to uncovering worthy portfolio candidates. Ignore them at your own risk.
  8. Investing

    Comparing the P/E, EPS And Earnings Yield

    Here are three ratios that help investors value stock returns.
  9. Investing

    The Pros And Cons Of A Pegged Exchange Rate

    A pegged exchange rate occurs when one country fixes its currency’s value to the value of another country’s currency. But it has both pros and cons.
RELATED FAQS
  1. What are some of the limitations and drawbacks of using a payback period for analysis?

    Examine the payback period method of analyzing proposed capital investment projects, and learn about its advantages and disadvantages. Read Answer >>
  2. How do you find the break-even point using a payback period?

    Understand what a company's breakeven point is and what its payback period is. Learn why a company would want to track both ... Read Answer >>
  3. How do you calculate payback period using Excel?

    Find out more about the payback period, what it measures and how to calculate it using Microsoft Excel. Read Answer >>
  4. What is considered a good PEG (price to earnings growth) ratio?

    Learn about the price/earnings to growth (PEG) ratio and understand what investors and market analysts consider a good ratio ... Read Answer >>
  5. What are common growth rates that should be analyzed when considering the future ...

    Learn about some of the most commonly used measures for evaluating a company's future growth prospects and analyzing it as ... Read Answer >>
Hot Definitions
  1. Current Assets

    Current assets is a balance sheet account that represents the value of all assets that can reasonably expected to be converted ...
  2. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  3. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  4. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
  5. Depreciation

    Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account ...
  6. Ratio Analysis

    A ratio analysis is a quantitative analysis of information contained in a company’s financial statements.
Trading Center