Hey there

How is everyone going? This year has progressed so
quickly, I’m almost done with my first rotation, got 4 pay checks already but
still struggling to break even thanks to random unavoidable spending like
expenses related to moving from Newcastle to Canberra, telephone and internet
connection fees and things like that.

Anyhow, continuing with this year’s project, the next
indicator on the list is P/E growth ratio or PEG ratio.

PEG Ratio = P/E ratio ÷ annual EPS growth

We should all know what a P/E ratio is by now. EPS growth
or earnings per share growth is fairly straight forward as well I guess, if the
EPS grows from 10 cents to 11 cents, that is a growth of 10%. So if the P/E
ratio is 10 and the EPS growth is 10, that gives us a PEG Ratio of 1. The
theory is that if the company is fairly priced, its P/E ratio will equal its
growth rate (PEG Ratio of 1). If the PEG ratio is below 1, that could indicate
that the stock is underpriced and if it is above one, it could mean that it is
overpriced.

Sometimes the PEG ratio could be a negative number, is
those cases, the company’s earnings are expected to decline.

Keep in mind that different websites calculate the PEG
ratio differently. They can either a projected or trailing P/E ratio and annual
growth rate may be the expected growth rate for the next year of the next five
years. So just keep in mind that PEG ratios can be different depending on where
you look.

I personally do not look at PEG ratio much. I sometimes
look at it when a company have a very high P/E ratio and if the PEG ratio is
low, it could mean that the high P/E ratio is backed by a high growth rate.

I don’t really know how good or reliable it is as an
indicator for value of a stock. But I’ll have to say like all other indicators,
it is probably a good idea to not just base an investment decision on the PEG
ratio. Remember to look at the entire company as a whole and of course ask for
advice from a financial planner.

Feel free to leave a comment or shoot me an email. I’m happy
to hear your opinions on PEG ratios.