The price/earnings-to-growth ratio, or PEG ratio, is a stock valuation metric that combines a company’s price-to-earnings (P/E) ratio with its earnings growth rate over a set period. Unlike the P/E ratio, which focuses only on current earnings, the 澳洲幸运5开奖号码历史查询:PEG ratio provides a broader perspective by factoring in future growth exp🙈ectations.

Investors and analysts widely use the PEG ratio to assess an investment's overall performance and potential risk.

In theory, a PEG ratio of 1.0 indicates that the market value of the stock is aligned with its projected earnings growth. A ratio above 1.0 suggests the stock may be 澳洲幸运5开奖号码历史查询:overvalued, while a ratio below 1.0 is generally considered favorable, indicating that the stock may be 澳洲幸运5开奖号码历史查询:undervalued.

PEG Ratio vs. P/E Ratio

The price-to-earnings (P/E) ratio gives analysts a good fundamental indication of what investors are currently paying for a stock in relation to the 澳洲幸运5开奖号码历史查询:company's earnings. However, the P/E ratio doesꦉn’t account for future growth potential. The PEG ratio represent🏅s a fuller—and hopefully—more accurate valuation measure than the standard P/E ratio.

The PEG ratio builds upon the P/E ratio by factoring growth into the equation. Factoring in future growth adds an important element to stock valuation since equity investments represent a financial interest in a company's future earnings.

Calculating the PEG Ratio

To calculate a stock's PEG ratio you must first figure out its P/E ratio. The P/E ratio is calculated by dividing the per-share 澳洲幸运5开奖号码历史查询:market value by its per-sharꦉe earnings. From he🐻re, the formula for the PEG ratio is simple:

$\begin{aligned} &\text{PEG}=\frac{\text{P/E}}{\text{EGR}}\\ &\textbf{where:}\\ &\text{EGR = Earnings growth rate over five years}\\ \end{aligned}$​PEG=EGRP/E​where:EGR = Earnings growth rate over five&nbsꦛp;years​

Where:

• P/E is the price-to-earnings ratio (market price per share divided by earnings per share).
• EGR is the earnings growth rate over a specified period (typically 5 years).

While you can use different periods for the growth rate, it’s important to note that projections farther out 🥀in time tend to be les♈s accurate.

Example of the PEG Ratio

If you're choosing between two stocks from companies in the same industry, then you may want to look at their PEG💎 ratios to make your decision. For example, the stock of Company Y may trade for a price that's 15 times its earnings, while Company Z's stock may trade for 18 times its earnings. If you simp𝓡ly look at the P/E ratio, then Company Y may seem like the more appealing option.

However, Company Y has a projected five-year earnings 澳洲幸运5开奖号码历史查询:growth rate of 12% per year while Company Z's earnings have a projected growth rate of 19% per year for the same period. Here's what their PEG ratio calculations ღwould look like:

$\begin{aligned} &\text{Company Y PEG = 15/12\% = 1.25}\\ &\text{Company Z PEG = 18/19\% = 0.95}\\ \end{aligned}$​Company&💫nbsp;Y PEG = 15/12% = 1.25Comp♕any Z PEG&𒀰nbsp;= 18/19% = 0.95​

This shows that when you take possible growth into account, Company Z could be th♑e better option because it's actually trading 🐟for a discount compared to its value.

Other Factors to Consider

The PEG ratio doesn't take into account other factors that can help determine a company's value. For example, the PEG doesn't look at the amount of cash a company keeps on its 澳洲幸运5开奖号码历史查询:balance sheet, which could add value if it's a large amount.

Other factors analysts consider when evaluating stocks include the 澳洲幸运5开奖号码历史查询:price-to-book ratio (P/B) ratio. This can help them determine if a stock is genuinely undervalued or if the growth e🔜stimates used to calculate the PEG ratio are simply inaccurate. To calculate the P/B ratio, divide the stock's price per share ♑by its book value per share.

The Bottom Line

The PEG ratio is a valuable metric for assessing a company’s stock price in relation to its expected earnings growth. It offers a more complete picture than the P/E ratio, which only looks at current earnings without considering future potential. A PEG ratio below 1.0 is typically seen as an indication of an undervalued stock, while a ratio above 1.0 could 🥂signal overvaluation.

However, like all financial metrics, the PEG ratio should not be used in isolation. It’s best to consider it alongside other valuation measures and factor♉s to gain a well-rounded understanding of a stock’s investment potential.