Understanding the ratio price earnings growth (PEG ratio) and its limitations is a key component of learn trading and investing course.
Now lets look at Earnings Growth in the PEG ratio which is the Price Earnings Growth Ratio.
The formula for calculating the price earnings growth (PEG ratio) is as follows:
PEG Ratio to Growth = (Price / Earnings per Share) ÷ Earnings growth.
The G stands for Earnings per Share Growth i.e. the amount the Earnings per Share are projected to grow in % terms.
Lets consider an example:
Price = £10.00 per share
EPS = £1.00 per share
Therefore P/E = 10
Dividends are currently 10p per share but analysts estimate they will be 12p per in five years time. This represents a growth of 20% in dividends.
Therefore PEG = 10 ÷ 20 = 0.5
PEG = 0.5
If the PEG ratio is at 1 it is considered fairly valued i.e. the valuation is fair. Below 1 and you are looking at a stock that is undervalued.
Below is a video on PEG ratios: