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
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