The PEG ratio is a type of fundamental analysis that can be used to evaluate if the price of a stock is overvalued or undervalued.
It’s calculated by taking the price-to-earnings ratio and dividing it by the expected growth rate over a given period of time.
What is PEG ratio?
The PEG ratio is a stock valuation metric that measures the valuation of a company. It is calculated by dividing the price-to-earnings ratio by the growth rate. If you divide a high number by a low number, it will result in a small number, indicating that the stock is undervalued and vice versa.
The purpose of using this equation is to determine whether the price of your choice is overvalued or undervalued compared with its peers (or competitors).
Theoretically speaking, if you invest in stocks with high P/E ratios and low growth rates, then there’s more risk involved because they may be overvalued while stocks with lower P/Es but higher growth rates are less risky investments because they might have better prospects for profits in future years as well as now
How to calculate PEG Ratio?
Let’s get right to the example.
We’ll take a look at Coca-Cola and see how its PEG ratio stacks up with its competitors.
- First, you divide the P/E ratio by the growth rate. In this case, it’s 9.7/22%, which equals 0.42 (rounded).
- Then, you multiply your answer from step one by 100 so that it becomes easier to read – in this case, 4200%. That makes sense; we’re looking for stocks with low PEG ratios if we want high returns!
How to use PEG ratio in fundamental analysis?
When used in fundamental analysis, the PEG ratio is a way to compare stocks in different industries and find undervalued or overvalued stocks.
When using this metric, it will be beneficial to examine the historical data of both companies and how they have compared to one another.
When looking at a stock’s PEG ratio, you want to see if the stock has a lower than 1 PEG multiple because that means investors are paying less for each dollar of earnings growth than competitors in its sector (and vice versa). For example:
- Company A has a PEG ratio of 0.5 while Company B has a PEG ratio of 2.
- This means that investors are paying 50% less for each dollar of earnings growth from Company A compared with Company B.
How to find PEG ratios of stocks that you want to invest in?
To find the PEG ratio of a stock, you can:
- Look it up on Yahoo Finance.
- Search for it on Google.
- Visit any of the many websites that will show you almost anything about stocks, including their PEG ratios!
How to read the PEG ratio and decide if it’s good or bad for your investment?
If you’re reading the PEG ratio, it means that you want to find out if a stock is cheap or expensive.
The first thing to notice is the value of PEG ratio.
For example, if a company has a PEG ratio of 1, then its current price is equal to its earnings growth rate.
If a stock has a low PEG ratio (less than one), it means that its price is lower than what its earnings growth rate represents.
This usually happens when stocks are undervalued and thus offer investors an opportunity for future appreciation in value.
It also means that investors can expect steadily increasing dividends from such companies in the future years as well as an increase in share prices if market conditions remain favorable for these stocks during this period.
On the other side of things, equities with high P/E ratios are overvalued due to their inability to grow at par with their earnings per share estimates over time; hence they offer less profit potentials for investors when compared against those which have low multiples calculated using similar metrics like Price-to-Earnings Ratio (P/E).
If you are looking at buying shares from these companies then keep in mind the higher risks associated with them because future gains may not be able to match past performances given how much they already cost now
Can you use the same formula for different companies and industries?
Yes, you can use the same formula for all companies and industries.
The PEG ratio is a relationship between earnings growth and price to book value that gives a good indication of whether a company is underpriced or overpriced.
Therefore, it’s always worth comparing your stock’s P/E ratio to its industry average and overall market value.
Why do we need PEG ratio in fundamental analysis?
PEG ratio is a useful tool to help you determine whether a stock is undervalued or overvalued and whether it’s cheap or expensive.
It can also be used as a screening tool for identifying stocks with low P/E ratios that are trading at very low multiples.
If you invest in individual stocks, PEG ratio can help you identify if the company’s current price is too high relative to its earnings growth expectations.
If the PEG ratio is less than 1, then it means that the stock might be undervalued and should outperform other stocks in terms of future returns.
How does a low PEG ratio affect your investment decision-making process?
A low PEG ratio means that the stock is cheap. A high PEG ratio means that the stock is expensive by comparison.
By looking at the PEG ratios of all companies in a particular industry, you can get an idea of which stocks are undervalued and which ones are overpriced.
A company with a low PEG ratio is likely to have higher growth rates than those with high ratios, so this information can help you decide whether or not to invest in certain stocks.
How does a high PEG ratio affect your investment decision-making process?
If you are an investor, then you must be familiar with the PEG ratio.
Let’s see how it works and how it affects your investment decision-making process.
The PEG ratio is a useful metric for fundamental analysis.
It measures the relationship between a company’s share price and its expected earnings per share over the next year (EPS).
The lower the value of PEG, the better its financial performance as compared to other companies in its industry/sector irrespective of market conditions or macroeconomic factors such as interest rates, inflation rate, etc.
A high PEG ratio means that investors are paying too much for those earnings which could lead them to losses if there is no improvement in their earnings or any significant increase in market share due to their strong brand presence (like Apple Inc.).
What are some other useful ratios and what do they tell us about the company we are looking at investing
While the P/E ratio is a good basic indicator of a company’s valuation, there are other useful ratios that can provide you with a more complete picture of their value. Some of these include:
- The P/S ratio shows how many times revenue is being paid for each dollar of assets owned by the company. If its P/S ratio is less than one then investors may be willing to pay more than what the company itself is worth.
- The dividend yield tells us how much money investors will receive in dividends each year based on their initial investment amount. This can be useful when it comes time to cash out and sell your shares because it allows you to calculate exactly how much profit you’re making from your investment as well as what percentage return on investment you’re expecting over time given current market conditions and projected growth rates (if any).
- The price-to-book (P/B) ratio measures how much shareholders have invested per share versus how much those same shares would cost if bought separately through an initial public offering (IPO).
In conclusion, we can say that the PEG ratio is a great tool to use in your fundamental analysis and it can be applied to many different companies.
It tells you how much you are paying for one dollar of earnings growth by dividing the PE ratio by the expected earnings growth rate.
A low or negative PEG ratio means that investors are paying less than they should be for future growth; a high or positive PEG ratio means investors are paying more than they should be for future growth potential.