Price/Earnings To Growth – PEG Ratio

PEG ratio is calculated by taking the P/E ratio of the stock and dividing by the growth rate of the stock. For example, a stock with a P/E of 10 and a growth rate of 10% would have a PEG ratio of 1. Though this is somewhat flawed mathematically, the PEG ratio accounts for growth when measuring a stock’s valuation. A stock with a P/E of 30 may seem overvalued unless you take into account its earnings have been growing at 50% a year for the past few years.

An important issue to deal with when using the PEG ratio is determining how to calculate the rate of growth. The PEG ratio is not foolproof as the growth rate may change unexpectedly but it is an improvement on the P/E ratio.

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