Price/Earnings To Growth (PEG) Ratio

Definition: Price/Earnings To Growth (PEG or PE/G) is a ratio used to determine a stock's value while taking into account the earnings generated per share, and the company's expected growth. A lower ratio indicates that the stock is undervalued.

Formula:
PEG Ratio = Price per Earnings / Annual EPS Growth
Or,
PEG Ratio = P/E / Projected growth in earnings

Example 1:
Tammy Ltd has a P/E of 30 and analysts expect its earnings will grow 25% annually, then the Price/Earnings To Growth ratio = 30 / 25 = 1.2

Example 2:
Toms Company is trading at $30/share with an EPS of $1.00 for a P/E of 30. Analysts expect a 50% annual earnings increase over the next few years. Then, the PEG ratio would be: 30 / 50 = 0.60

Example 3:
MPACC Company is trading at $25 per share with an EPS of $1.00. Analysts predict a 20% annual earnings increase over the next five years. Calculate the PE/G ratio.
Solution:
P/E = 25 / 1 = 25
PE/G ratio = 25 / 20 = 1.25

* Next: Return on Investment Ratio Analysis

Author

Kelvin Wong Loke Yuen is an experienced writer with a strong background in finance, specializing in the creation of informative and engaging content on topics such as investment strategies, financial ratio analysis, and more. With years of experience in both financial writing and education, Kelvin is adept at translating complex financial concepts into clear, accessible language for a wide range of audiences. Follow him on: LinkedIn.

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