PEG ratio
Price/Earnings to Growth ratio.
The PEG ratio compares the price to earnings ratio of a company with its expected rate of growth in earnings.
It is defined as:
PEG ratio = Price to earnings ratio / expected percentage rate of growth in earnings
PEG = PER / g%
Example 1
Company A's price to earnings ratio (PER) = 10
The expected rate of growth of Company A's earnings (g%) = 12.5% (= 12.5 for the purposes of the PEG calculation)
The PEG ratio = 10 / 12.5
= 0.8.
Example 2
Company B's price to earnings ratio (PER) = 15
Its PEG ratio is reported as 0.95
Calculate the expected rate of growth of Company B's earnings (g) implied by the PER of 15 and the PEG ratio of 0.95.
Solution
PEG ratio = Price to earnings ratio / expected rate of growth in earnings
PEG = PER / g%
Rearranging this relationship:
g% x PEG = PER
g% = PER / PEG
= 15 / 0.95
= 15.8%
Like other ratios, PEG ratios will not be properly comparable unless the basis for their inputs is clear and consistent.
PEG ratios should be treated with particular caution, as the basis for determining their inputs can be very subjective.
