Tan Kin Lian - Investment Journey PE and PEG ratio
I am familiar with the PE ratio. It is the ratio of the stock price divided by the earnings per share (EPS). If the EPS is $1 and the stock price is $15, the PE ratio is 15.0 times. This ratio of 15.0 times represents a fair value for the stock, i.e. the stock price represents 15 years of earnings. 

The PEG ratio is the PE ratio divided by the growth rate. If the PE ratio is 15.0 times and the growth rate is 10 percent, the PEG ratio is 15.0/10 = 1.5 times. 

If 2 stocks have the same PE ratio of 15.0 times and the growth rate of A is 10% and B is 15%, the PEG ratio of A is 15.0/10 = 1.5 and the PEG ratio of B is 15.0/155 = 1.0. Stock B is better valued as the PEG ratio is lower. 

The growth rate is based on analysts forecast and can be taken over 1 year or a multi-year period, say 3 or 5 years. The growth rate is based on percent, so 20% growth means 20. 

If a growth stock has a PE ratio of 20 times, it is considered expensive (as the typical PE ratio is 15.0 times). However, if the stock has a growth rate of 20%, the PEG ratio drops to 1.0 which suggest that the stock is attractively valued.

I have been confused with the PEG ratio for some time as the financial literature does not give a good example of its calculation. I have now learned from Google Bard about how it is calculated. 

Tan Kin Lian 

 

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