The PEG ratio is a formula used to estimate a stock’s value using its P/E ratio and its future earnings growth. Unlike the P/E ratio, the PEG ratio considers a stock’s earnings growth potential. To calculate a stock’s 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 stock’s 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. |
