A Quick Take on PEG Ratio

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.