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.