• Financial Statements
  • Valuation Ratios: The PEG Ratio

    by Joe Lan, CFA

    In the past two articles in the Financial Statement Analysis series, I provided an introduction to valuation ratios and an analysis of the dividend discount model.

    In this article, I continue my discussion of valuation metrics with the ratio of price-earnings to earnings growth, known as the PEG ratio.

    The Price-Earnings Ratio

    The price-earnings ratio (P/E) is one of the most basic metrics of stock valuation. It is calculated by dividing a stock’s current price by its earnings, giving a relative valuation of a company based on its level of earnings per share. It allows investors to compare stocks with very different earnings per share on equal footing.

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    Joe Lan, CFA is a former financial analyst for AAII.


    Discussion

    Robert Jarvis from GA posted over 2 years ago:

    Good article; PEG is the second data point, after PE, I examine when deciding to follow or buy a stock. Low PEG ratios also help me find under appreciated securities which has paid off many, but of course not all, times.


    Alvin Hawk from AL posted over 2 years ago:

    I HAVE WATCHED THIS NUMBER. I THINK THAT IT IS A
    GREAT METHOD OF EVALUATION.


    Thomas Nevers from AZ posted over 2 years ago:

    I'm confused about adjusting for dividends. Since dividends are included in net income, seems that you are double counting dividends with your dividend adjustment formula. Let me know if I am missing something.


    Dave Steffes from MN posted about 1 year ago:

    PEG is an improvement over the PE, especially in growth industries, as long as earnings and growth hold up. Now we need a tool to evaluate the quality of company management.


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