What is PEG Ratio?

The PEG ratio represents the price to earnings-to-growth ratio, which measures how the stock is valued against its earnings growth. Unlike the price-earnings ratio, which is the company’s earnings per share, the PEG ratio also considers future growth to determine if the stock is worth more or less than its stated price. Since the PEG ratio emphasises growth, it provides a relative basis for analysing companies with varying growth levels. It is stated that any PEG value that is less than 1 implies that the stock is undervalued relative to its expected growth. This article explains what is PEG ratio is, how is it calculated, its advantages, disadvantages and more in detail.   

How to Calculate the PEG Ratio? 

Here’s how to calculate PEG ratio value. 

• Find the current earnings per share (EPS) and the stock price. 
• Get the P/E Ratio (Stock Price ÷ EPS). 
• Identify the Expected Growth Rate (as a percentage). 
• Determine the PEG Ratio (P/E Ratio ÷ Growth Rate). 

Example Calculation:  

• Stock Price: ₹200 
• EPS: ₹10 
• P/E Ratio: 20 ($200 \div 10$) 
• Growth Rate: 10% 
• PEG Ratio: 2 ($20 \div 10$) 

The stock may be valued higher than its expected growth in profits, as indicated by the PEG ratio of 2. 

How to Interpret the PEG Ratio? 

Here’s how investors can interpret PEG ratio. 

• PEG < 1: The stock might be cheap in relation to its potential for growth. 
• PEG = 1: The stock price accurately reflects the rise in earnings. 
• PEG > 1: The stock may be overvalued relative to its growth rate. 
• Negative PEG: happens when earnings growth is negative; suggests caution. 
• Use with other metrics: The PEG ratio works well when combined with the P/E ratio, industry averages, and company facts. 

What is Considered to be a Good PEG Ratio? 

A good PEG ratio is typically considered to be below 1. This indicates that the stock is undervalued as compared to its expected growth. The future earnings are not reflected fully by the stock price. If the PEG ratio is above 1, then it indicates that the stock is overvalued. 

What Does the PEG Ratio Indicate? 

Valuable insights are provided by the PEG ratio in the stock market. Let’s take a closer look at them.  

• A low P/E ratio might suggest that a stock can be a suitable investment option. However, incorporating the growth rate through the PEG ratio can offer a more accurate picture. 
• In general, a lower PEG ratio indicates that perhaps the stock is relatively undervalued based on its future earnings potential. 
• Considering a company's growth rate reflects companies with high P/E ratios but strong growth prospects. 
• The interpretation of the PEG ratio varies from industry to industry and depends on the type of company. 
• Many investors consider a PEG ratio below 1 as ideal, suggesting an undervalued stock. 
• A PEG ratio of 1.0 represents the fair value of a security. 
• A PEG ratio above 1.0 suggests overvaluation, while a ratio below 1.0 points to potential undervaluation. 

Advantages and Disadvantages of the PEG Ratio 

The following are the advantages and disadvantages of the PEG ratio. 

Conclusion 

Price-to-earnings ratios and the predicted earnings growth are compared to determine a stock's valuation using the PEG ratio. Investors should be aware of the PEG ratio since it allows them to assess if a given stock is overpriced or undervalued. The PEG ratio is highly dependent on the accuracy of the growth estimates of a company. Yet, it is a useful metric for spotting potential investment opportunities in the stock market. You may access the necessary tools to find this key financial metric on an online trading app.