What is the PEG Ratio?
The PEG ratio is a valuation metric used to evaluate a company using its stock price and earnings growth rate. The ratio divides the company's stock price by its earnings growth rate.
That shows you how much investors are paying for each percentage point of earnings growth of a company.
PEG Ratio Calculator
This PEG ratio calculator will give you the PEG ratio using:
- Company stock price
- Earnings growth rate or expected earnings growth rate
PEG Ratio Formula
PEG Ratio = (Company Stock Price) / (Earnings Growth Rate)
To find earnings growth rate, you can use the earnings growth rate calculator. Or you can use a regular calculator or paper to apply the earnings growth rate formula.
To find the stock price, you can check any financial site that provides stock quotes. You will usually see the PEG ratio calculated using the closing price.
You can find the price and EPS numbers on any site that provides financial quotes.
Why is the PEG Ratio Important?
The PEG ratio is important because it helps investors evaluate a company for investment. It tells investors how much the market is paying for each percentage point of earnings growth.
Using the PEG ratio, investors and analysts can:
- value a company relative to its earnings growth
- compare a company to its competitors.
- compare a company's current valuation based on earnings growth to that of the past.
- compare a company's PEG ratio to the average PEG ratio of the companies in its sector.
- find the price at which they may want to buy a stock.
The PEG ratio is sometimes used as an alternative to the P/E ratio since investors typically seek earnings growth. The PEG ratio gives a valuation in relation to EPS growth. So, investors can use PEG ratios to find companies that are cheapest in relation to their earnings growth.
Understanding PEG Ratio
To understand PEG ratio, consider an analogy of buying a tree.
In this analogy, you're considering two orange trees:
- Orange tree A: Costs $1000, produced 50 oranges this year, and is 10' tall
- Orange tree B: Costs $1000, produced 50 oranges this year, and is 10' tall
So far, these oranges are the same. You might look at these oranges this way:
- Cost is like a stock price
- Oranges produced is like a dividend
- Height is like the earnings per share
Given that information, these orange trees seem the same. And as companies they would seem the same, too.
But, what if I told you Tree A was 9.75' tall last year, and Tree B was 7.5' tall last year?
Now you know that A is barely growing, while B is growing quickly.
If we assume that growth is a good thing you're probably going to choose Tree B. Current growth doesn't guarantee future growth, but a tree that is younger and growing more quickly might continue to surpass an older, slower-growing tree. In the same way, the earnings of an emerging growth company may continue to surpass those of an aging blue-chip company.