Price to Earnings Growth

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Forbes  Jul 26  Comment 
Looking at options trading activity among components of the S&P 500 index, there is noteworthy activity today in Public Service Enterprise Group Inc (NYSE: PEG), where a total volume of 12,012 contracts has been traded thus far today, a contract...
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This valuation metric takes both growth and dividends into account.
Benzinga  Jul 18  Comment 
Perhaps the most often cited measure of whether a company's stock is expensive, the price-to-earnings or "P/E" ratio is calculated by dividing a stock's price by its earnings per share ("EPS") over the most recent twelve months, also called the...




 

This article is about the financial metric Price/Earnings To Growth. For the article on the company with ticker PEG, see Public Service Enterprise Group (PEG).

The PEG ratio equals the P/E Ratio divided by projected annual earnings-per-share growth

The PEG ratio (alternately PE/G, P/E to G, Price/Earnings to Growth, or Price to Earnings to Growth) is a valuation metric comparing the Price to Earnings ratio of a company to its projected annual Earnings Per Share growth.

A PEG ratio below 1 would indicate a company is undervalued relative to its share price, while a PEG greater than 1 would indicate an overpriced stock, as a high P/E should generally correlate with a market expectation of greater forthcoming earnings.

However, as PEG relies on projected EPS growth, its usefulness is tied directly to the accuracy of such projections.

It must be noted that PEG is only a rule of thumb and has no underlying mathematical basis for gauging what a company's share price truly "should" be. The ratio has been criticized for penalizing value stocks, which have lower earnings growth.

Examples

  • Company XYZ is trading at $20/share with an EPS of $1.00 for a P/E of 20. Analysts predict a 50% annual earnings increase over the next five years. The PEG ratio of XYZ is therefore .40, indicating the stock is undervalued by the market assuming the earnings projection is accurate.
  • Company ABC is trading at $50/share with an EPS of $1.00 for a P/E of 50. Analysts predict a 50% annual earnings increase over the next five years. The PEG ratio of ABC is therefore 1.00, indicating the stock is valued properly by the market assuming the earnings projection is accurate.
  • Company LMN is trading at $10/share with an EPS of $1.00 for a P/E of 10. Analysts predict a 5% annual earnings increase over the next five years. The PEG ratio of LMN is therefore 2.00, indicating the stock is overvalued by the market assuming the earnings projection is accurate.
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