The Eequity market has been quite volatile for most of 2022 while facing headwinds for various macroeconomic reasons.
In such a scenario, an investor needs to consider the price-to-earnings-to-growth ratio, referred to as the PEG ratio, to take into account how the stocks of a company are priced.
The PEG ratio compares a company’s price-to-earnings (P/E) ratio to its expected rate of growth over a period of time. Generally, in the next one-three years, which is a crucial factor for assessing its value.
With a PEG ratio, an investor can put a price on the rate of growth of a particular company. The calculation of PEG involves dividing a company’s P/E ratio by its expected rate of growth.
An investor needs to take into account three things to calculate the PEG ratio: Stock price, earnings per share and expected rate of growth.
While the price of a stock is simply its current market price, complexities are likely to arise in trying to estimate earnings per share and rate of growth.
Generally, a PEG ratio of 1.0 or lower highlights a stock is fairly priced or even undervalued. On the other hand, a PEG ratio over 1.0 signifies a stock is overvalued.
Having said that, investors need not rely exclusively on the PEG ratio or any other financial metric for that matter as it involves estimation. There is a possibility that a particular company’s PEG ratio is less than or greater than 1.0 does not completely mean that it remains a relatively good or bad investment.
The PEG ratio could act as just one of the several factors in the evaluation of investments in the long run.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.