In that case, the former would be a more reasonable investment avenue. The former exhibited a P/E ratio of 20, and the latter had a ratio of 25. Therefore, when simply basing comparison among stocks on their P/E ratios, a low value is more lucrative compared to higher values.įor instance, assume there are two stocks – stock A and stock B. The P/E ratio denotes the rupee amount a shareholder needs to pay for a particular stock for earning Re.
They should also factor in considerations like change in business conditions, breakthroughs by a company, etc. This helps to check whether it is in line with their past performance. They can also make use of estimates published by analysts at their websites.įor near-about accuracy, investors can compare such estimated growth rates to a company’s track record. To find such growth rate projections, investors can refer to such a company’s own announced projections. However, the higher the number of years, the more there is a chance of inaccuracy in results. It can be 1-year, 2-year, 3-year, and so forth. 8 (1200000 / 150000).Įstimations concerning a company’s growth rate can stretch across different periods. Therefore, its EPS, as per the records of FY 20 – 21, is Rs. Its EPS witnessed a 2% growth over the last year and is projected to grow by 2.5% for the next year. The market price of its share at that time was Rs.10, and it had a total of 150,000 outstanding shares. Price/earnings-to-growth = (Market price of stocks per share/EPS) / Earnings per share growth rateĪ PEG ratio is both grounded in objective information and is forward-looking – a factor that lends more credibility to the metric.Įxample: Company A recorded earnings worth of Rs.12 lakh in FY 20 – 21. Therefore, the PEG ratio formula is written as: It shall be noted that the P/E ratio, thus considered for PEG ratio is the trailing version and not the forward P/E ratio. How to Calculate PEG Ratio?Īs mentioned previously, it denotes the ratio between a stock’s P/E ratio and its projected growth in earnings. Therefore, for more fundamental analysis, the PEG ratio is crucial. In other words, it allows investors an idea about a stock’s actual value like a P/E ratio does while also factoring in its growth potential. This metric can provide a much more informed view of a stock in relation to its earning potential. What is a PEG Ratio?Ī PEG ratio, or Price/earnings-to-growth ratio, draws the relationship between a stock’s P/E ratio and projected earnings growth rate over a specific period.
However, it has a lesser-known and more useful cousin that facilitates a greater understanding of a stock’s real value, and that is the PEG ratio. One of these metrics is the Price-to-earnings ratio. While the process might sound daunting, some metrics facilitate the purpose conveniently. Fundamental analysis of stocks to determine their actual value is a common practice amongst investors.
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