The PEG Ratio, or Price/Earnings to Growth ratio, helps investors understand the relationship between a stock’s price, earnings, and expected growth, offering a more dynamic picture than the P/E ratio alone. It is calculated by dividing the Price-to-Earnings (P/E) ratio by the earnings growth rate.
Content :
- PEG Ratio Meaning
- PEG Ratio Example
- How to Calculate PEG Ratio? – PEG Ratio Formula
- PEG Ratio vs PE Ratio
- What Is A Good PEG Ratio?
- Best PEG Ratio Stocks
- What Is PEG Ratio? – Quick Summary
- Convertible Bonds – FAQs
PEG Ratio Meaning
The PEG Ratio is a tool used to see if a stock’s price is reasonable, considering how much its earnings are expected to grow. The PEG Ratio, unlike the P/E ratio that looks at current earnings, also considers future earnings growth, offering a clearer picture for investors interested in growth stocks.
The PEG Ratio is particularly useful in comparing companies within the same industry or sector. It helps identify stocks that might be undervalued or overvalued when their growth potential is considered. A lower PEG Ratio can indicate that a stock is undervalued relative to its growth prospects, while a higher ratio might suggest overvaluation.
PEG Ratio Example
For instance, consider a company with a P/E ratio of 15 and an expected annual earnings growth rate of 10%. To calculate its PEG Ratio, divide the P/E ratio by the growth rate. Here, the PEG Ratio would be 1.5 (15 divided by 10). A PEG Ratio of 1.5 suggests that the stock might be fairly valued or slightly overvalued
How to Calculate PEG Ratio? – PEG Ratio Formula
The PEG Ratio is calculated using the formula: PEG Ratio = (Price/Earnings Ratio) / Annual Earnings Growth Rate.
For example, if a stock has a P/E ratio of 20 and its earnings are expected to grow at 15% per year, the PEG Ratio would be calculated as follows:
PEG Ratio = 20 / 15 = 1.33
This result indicates that the stock’s price is 1.33 times its earnings growth rate. A PEG Ratio closer to or below 1 generally suggests that the stock may be undervalued, considering its growth potential.
PEG Ratio vs PE Ratio
The main difference between the PEG Ratio and the PE Ratio is that the PEG Ratio includes expected earnings growth in its calculation, providing a more comprehensive view of a stock’s value, while the PE Ratio focuses only on current earnings without considering future growth.
| Parameter | PEG Ratio | PE Ratio |
| Definition | Measures a stock’s value accounting for expected earnings growth. | Assesses a stock’s current value relative to its earnings. |
| Calculation | PE Ratio divided by the annual earnings growth rate. | Market price per share divided by annual earnings per share. |
| Focus | Long-term growth potential of the company. | Current earnings performance. |
| Usefulness | Better for evaluating growth stocks. | Useful for comparing companies within the same industry. |
| Interpretation | A lower ratio often indicates potential undervaluation. | A higher ratio may indicate overvaluation or high investor confidence. |
| Limitations | Relies on estimated future earnings, which can be uncertain. | Does not consider future growth prospects. |
| Investor Preference | Preferred by investors focusing on growth potential. | Favored for assessing current financial health and valuation. |
What Is A Good PEG Ratio?
A PEG Ratio of less than 1 typically indicates that a stock may be undervalued relative to its growth prospects, making it attractive to investors. Conversely, a ratio higher than 1 might suggest that the stock is overvalued.
However, it’s important to note that the interpretation of a “good” PEG Ratio can vary depending on the industry, market conditions, and other company-specific factors.
Best PEG Ratio Stocks
Here are some of the best stocks in India in 2024 with favorable PEG Ratios, indicating potential for growth relative to their current valuations:
| Company Name | Industry Sector | PEG Ratio | Remarks |
| CPCL | Oil and Gas | 0.45 | Leading player in the oil and gas sector. |
| Andhra Paper | Paper Manufacturing | 0.01 | Engaged in paper manufacturing, indicating high growth potential. |
| West Coast Paper | Paper Industry | 0.04 | Key company in the paper industry, showing promising growth. |
| Dhunseri Ventures | Diversified Sectors | 0.13 | Active in multiple sectors, with moderate growth potential. |
| ONGC | Oil and Gas | 0.46 | Major player in oil and gas, with significant market presence. |
| Seshasayee Paper | Paper and Paper Products | 0.00 | Specializes in paper products, indicating very strong growth potential. |
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What Is PEG Ratio? – Quick Summary
- The PEG Ratio is a stock valuation tool that combines a company’s P/E ratio with its earnings growth rate.
- The formula for calculating the PEG Ratio is the P/E ratio divided by the annual earnings growth rate, providing a straightforward yet powerful metric for investors.
- Comparatively, the PEG Ratio is more comprehensive than the PE Ratio, factoring in growth potential alongside current earnings valuation.
- Generally, a PEG Ratio around or below 1 is considered good, indicating potential undervaluation relative to growth prospects.
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Convertible Bonds – FAQs
1. What Is PEG Ratio?
The PEG Ratio is a financial metric used to determine a stock’s value by considering its price-to-earnings (P/E) ratio and expected earnings growth rate.
2. What is a good PEG ratio?
A good PEG Ratio is typically around or below 1, indicating that a stock’s price aligns with its earnings growth potential.
3. Is a negative PEG ratio good?
A negative PEG ratio often indicates unusual financial circumstances, such as negative earnings growth, and requires careful analysis to understand its implications.
4. What is the advantage of calculating PEG ratio?
The advantage of the PEG Ratio is that it combines the P/E ratio with growth prospects, offering a more comprehensive view of a stock’s potential value.
5. How is PEG ratio calculated?
The PEG Ratio is calculated by dividing the P/E ratio by the annual earnings growth rate, integrating both valuation and growth aspects.
6. What is the difference between PEG ratio and PE ratio?
The main difference between PEG ratio and PE ratio is that the PEG Ratio includes earnings growth in its calculation, while the PE Ratio only considers current earnings.
We hope that you are clear about the topic. But there is more to learn and explore when it comes to the stock market, commodity and hence we bring you the important topics and areas that you should know:
