The price/earnings to growth ratio (PEG ratio) of a stock is its price/earnings ratio (P/E r💝atio) divided by its percentage growth rate.

Stock analysts and investors calculate this number to determine how expensive the shares are relative to the company's earnings performance.

Example and Calculation of a PEG

Let's say you're analyzing a stock that is trading with a P/E ratio of 16. Suppose the company's earnings per share (EPSꦜ) have been growing and will continue to grow at 15% per year.

By taking the P𒅌/E ratio (16) and dividing it by ♔the growth rate (15), the PEG ratio is calculated as 1.07.

Things are not always so straightforward when it comes to determining which growth rate to use in the calculation. Suppose instead that your stock had grown earnings at 20% per year in the last few years but was widely expected to grow earnings at only 10% per year for the fo𒐪reseeable future.

To compute a PEG ratio, you need to first decide which number you will plug into the formula. Youꦦ could take the future expected growth rate (10%), the historical growth rate (20%), or any kind of🐲 average of the two.

Forward PEG

The first method of calculating PEG is to use a forward-looking growth rate for a company. This number would be an annualized growth✅ rate (ꦛi.e., percentage earnings growth per year), usually covering a period of up to five years.

Using this method, if the stock in our example was expected to gro🤪w future earnings at 10% per year, its forward PEG ratio would be 1.6 (P/E ratio of 16 divided by 10).

Trailing PEG

Some investors use another method, in which the stock's trailing PEG ratio is calculated by using trailing growth rates. The trailing growth rate could be derived from the 澳洲幸运5官方开奖结果体彩网:last fiscal year♈, the previous 12 months, or a multiple-year historical average.⛦

Turning again to the stock in our example, if the company had grown earnings at 20% per year for the past five years, you could use that number in the calculation, and the stock's PEG would be 0.8 (16 divided by 20).

Which Approach Should You Use?

Neither one✨ of these approaches to a PEG ratio calculation is wrong. The different methods simply provide different information.

Investors are concerned about the price they are paying for a stock relative to what it should earn in the future, so they often use forward gro🐼wth rates. However, trailing PEG ratios can also be useful to investors, and they avoid the issue of estimation since historical growth rates are hard facts.

What's a 'Good' or 'Bad' PEG Ratio?

Regardless of what type of growth rate you use in your PEG ratios, what matter🐼s most is that you apply the same method to all the stocks you look at to ensure that your comparisons are accurate.

Generally ౠspeaking, a PEG ratio of less than 1 suggests a well-priced investment, while a ratio over 1 suggests less of a deal.

Remember, PEG ratios don't tell you anything about the future prospects of a company. For example, a company that is sure to go bankrupt will likely have a very low PEG ratio, but that doesn't mean it's a good investment.

The Bottom Line

The PEG ratio isn't perfect, but it's a good way to measure a stock's current value relative to its peers.

Once you've got this number, it's wise to try to determine why the stock's PEG ratio is higher or lower than that of its competitors. There may or may not be a good reason why the stock is cheaper or more expensive.