PEG Ratio Calculator

The PEG (Price/Earnings to Growth) ratio is a valuable metric in financial analysis, combining the price-to-earnings (P/E) ratio with the company's earnings growth rate to evaluate a stock's valuation. Unlike the P/E ratio alone, which can suggest a stock is overvalued or undervalued without considering its growth prospects, the PEG ratio incorporates growth, offering a more nuanced view.

Historical Background

The PEG ratio was popularized by famous investor Peter Lynch. It's considered a refined metric because it accounts for the expected growth of a company, helping investors find companies that might be bargains relative to their growth potential.

Calculation Formula

The PEG ratio is calculated using the formula:

\[ PEG = \frac{P/E}{EPSG} \]

Where:

• \(PEG\) is the price-earnings to growth rate ratio,
• \(P/E\) is the price-earnings ratio,
• \(EPSG\) is the earnings per share growth rate (in percentage).

Example Calculation

If a company has a P/E ratio of 15 and an EPS growth rate of 10%, the PEG ratio would be calculated as:

\[ PEG = \frac{15}{10} = 1.5 \]

Importance and Usage Scenarios

The PEG ratio is essential for investors seeking to understand a stock's valuation in the context of its growth potential. A lower PEG ratio may indicate that the stock is undervalued relative to its growth prospects, making it potentially a good investment. Typically, a PEG ratio of 1 or less is considered desirable, suggesting that a stock is priced appropriately relative to its earnings growth.

Common FAQs

1. What does the PEG ratio tell you?

   • The PEG ratio offers a more comprehensive view of a stock's valuation by considering its earnings growth rate in addition to its price-to-earnings ratio. It helps identify stocks that may be undervalued or overvalued when growth prospects are considered.

2. How does growth rate affect the PEG ratio?

   • A higher growth rate (EPSG) will result in a lower PEG ratio, assuming the P/E ratio remains constant. This typically suggests that a stock may be undervalued relative to its growth prospects.

3. Can the PEG ratio be used for any stock?

   • While useful, the PEG ratio may not be applicable for companies that do not have positive earnings or for those in industries with highly variable growth rates. It's most effective for evaluating companies with steady growth patterns.

This calculator simplifies calculating the PEG ratio, facilitating a better understanding of investment opportunities by incorporating growth into the valuation equation.