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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