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PEG Ratio
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The PEG ratio is a formula used to estimate a stocks value using its P/E ratio and its future earnings growth. Unlike the P/E ratio, the PEG ratio considers a stocks earnings growth potential. To calculate a stocks PEG ratio, its P/E ratio must be further divided by its projected earnings growth rate. A stock with a PEG ratio less than 1 is considered undervalued (and generally a good buy); greater than 1, overvalued. Of course, a PEG ratio of 1 indicates a stock with a fair value. The PEG ratio is not a firm measurement but simply a guideline, and the PEG ratio should not be used as the sole indicator of a stocks under- or overvaluation. In addition, a PEG ratio of a stock should only be compared with PEG ratios of stocks from companies in similar sectors. This will ensure consistency during analysis.
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