Price to Earnings Growth

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Charles Armstrong

Asset Prime

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.