PEG ratio

The price-earnings - growth ratio (PER - growth ratio; engl. 's Price - Earning to Growth ratio) is an indicator for evaluating the shares of growth stocks. As a shortcut, the English PEG has become the norm in the German language.

To calculate the PEG, the price- earnings ratio is set in relation to the average, long-term expected earnings growth. Usual is an estimate for the next three to five years.

As a rough estimate holds: With a PEG of less than 1 undervalued the stock is at a value greater than 1 to be overvalued.

Example

A stock is valued at 10 times earnings, and analysts expect the company a profit growth of 20 % per year. Then this stock has a PEG of 0.5 and should be doubled to reach their fair value in the course.

Criticism

The future profit growth is not always derivable from the figures of the past. Companies, which give the impression of growth stocks in good economic times, may prove in the recession as cyclical. Before using the PEG ratio is therefore necessary to consider how plausible is a continuation of growth. So rare it is for example in mechanical engineering companies and their suppliers, with raw materials and chemical values, or with service providers for corporate clients to growth stocks.

Successful, young companies often go through a high-growth phase, with annual increases in the mid-double -digit percentage range. It is necessary to consider whether the enterprise being valued is in such a phase, and a medium-term slowdown in growth can be expected.

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