Forward Earnings & PEG Ratio
PEG Ratio stands for Price-Earnings to Growth Ratio. It is a ratio used to determine a stock’s value while taking into account earnings growth. The calculation is as follows:
PEG Ratio = PER / Annual EPS Growth
PEG is a widely used indicator of a stock’s potential value. It is favored by many over the price/earnings ratio because it also accounts for growth.
Similar to the P/E ratio:
The lower the PEG Ratio, the more undervalued the stock is and the greater the bargain you are getting.
As a Rule of Thumb, a PEG Ratio of less than 1 is considered good. For example, if a stock is trading at a PE Ratio of 12 times and it’s expected Net Profit growth is 15%, its PEG Ratio works out to be 0.8 and this is generally considered favourable.
Keep in mind that the growth rate used is projected and may not be accurate. Also some investors look at growth rate for several years before deciding on a growth rate to use in the PEG Ratio calculation.
