Question

can some body help me to understand peg ratio

Answer 1

hi

PEG ratio = PE ratio / growth rate of EPS

Analysts use the PEG because it uses Growth rate of earnings as an important part of ratio . They use it to find the potential stocks
For a simple example:
2 stocks A & B :
Market Price A = 1000 $ , EPS A = 20 $ , Growth rate of A = 5%
Market Price B = 1200 $ , EPS B = 24$ and Growth of B = 10%
In short run we have
P/E (A)= 50 times and P/E (B) = 50 times .
The PE rates are equal, and we can have 2% return on each one of them and most of the times we chose "A".
BUT in long run ( second year)
eps A = 21$ and g A = 5% and P A = 1000 $
eps B = 26.4 $ and g B = 10% and p B = 1200 $
PE a = 1000/21 = 47.6 times , and PE b = 1200/26.4 = 45.4 times
Return a = 21/1000 = 2.1 % and Return b = 26.4/1200 = 2.2 % !!!!!
We can find it out in first year with PEG rate like this
PEG a = 50/ 5% = 1000 and PEG b = 50/10% = 500
(PEG / Price) 1000/1000 = 1 and 500 / 1200 = 0.41
It means that stock holders in market don’t know enough about value of the Stock “B”
PEG > 1 === over valuation
PEG < 1 === under valuation
PEG = 1 === exact valuation