PEG Ratio
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In finance, a PEG ratio is a financial ratio of a company. The PEG (price, earnings, growth) ratio compares the PE (price/earnings) ratio to the growth rate, which can be either historical PE ratios and growth rates or estimated future rates. A lower ratio is "better" ("cheaper") and a higher ratio is "worse" ("expensive").
Ratio
PE ratio / earnings (or earnings per share) growth in parts-per-hundred (%) (year-over-year trailing or over future years).......Trailing
The "trailing" PEG ratio calculated as:Trailing P/E / annual earnings growth in % ("link fiscal year", last fiscal year over the fiscal year before) = PEG ratio
Example: 227 / 6(%) = 38
Future
The PEG ratio kept by Yahoo! Finance in their "Key Statistics" (provided by Capital IQ) is not the trailing PEG ratio. Rather, it is the expected P/E for next year's earnings divided by the expected annual growth rate over the next 5 years (the exact formula is not mentioned, they are guessed below).Formula: (Forward P/E) / (future annual earnings growth) = PEG ratio
[Google example]: 40 / 23(%) = 1.75
Advantages
One reason investors may prefer the PEG ratio over measures such as earnings, revenues, tangible assets, or book value to price (market cap) is that such measures do not account for a company's potential for growth. The PEG ratio can offer a suggestion of whether a company's high PE ratio reflects an excessively high stock price, or is a reflection of promising growth prospects for the company.Disadvantages
The disadvantage of the PEG is that it is not considered to offer much information about a company, saying nothing about the quality of the company's management. If one would buy a portfolio of ten stocks with a PEG ratio of 0.5 and another portfolio of ten stocks with a PEG ratio of 1.5, there is not much to suggest whether the 0.5 portfolio will outperform the 1.5 portfolio over the next 1, 5, or 10 years.Additionally, the PEG ratio is often considered less appropriate for measuring income investments. Large, well-established companies, for instance, may offer dependable returns and dividend income, but little opportunity for growth.
See also
External links
Data
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