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Showing posts from September, 2018

Fundamental Analysis: Price-Earning-Growth (PEG) Ratio

We talked about the Price-Earning (PE) ratio in our previous post. We discussed its merits and demerits. In order to get a clearer picture of the company going forward we need to also look at company’s earnings growth. This anamoly is addressed by Price-Earning-Growth (PEG) ratio. PEG ratio is defined as the ratio of PE to the earnings growth of the stock. Earnings growth is typically taken for a five or ten year period. It tells us whether the PE is fair compared to its earnings growth. A PEG ratio of 1 represents that the stock is fairly valued. Value less than 1 represents undervaluation and value more than 1 represents overvaluation. Its formula is PEG RATIO = Price Earnings / Annual EPS Growth What does PEG ratio tell you? PEG ratio is used to ascertain the true relative value of the stock. Just like low PE ratios lower PEG means the stock is undervalued .Moreover it is an improvement over PE ratios because it takes into account the earnings growth also. A PEG ratio of 1 i