Why We Look at the PEG Ratio
One of the more popular ratios stock analysts look at is the P/E, or price to earnings, ratio. The drawback to a P/E ratio is that it does not account for growth. A low P/E may seem like a positive sign for the stock, but if the company is not growing, its stock's value is also not likely to rise. The PEG ratio solves this problem by including a growth factor into its calculation. PEG is calculated by dividing the stock's P/E ratio by its expected 12 month growth rate.
One of the more popular ratios stock analysts look at is the P/E, or price to earnings, ratio. The drawback to a P/E ratio is that it does not account for growth. A low P/E may seem like a positive sign for the stock, but if the company is not growing, its stock's value is also not likely to rise. The PEG ratio solves this problem by including a growth factor into its calculation. PEG is calculated by dividing the stock's P/E ratio by its expected 12 month growth rate.
For more information on utilizing the PEG ratio, visit Learning Markets.
How to Score the PEG Ratio
- Pass—Give the PEG Ratio a passing score if its value is less than 1.0.
- Fail—Give the PEG Ratio a failing score if its value is greater than 1.0.
Looking at the PEG ratio for WMT in above chart, WMT should receive a failing score. You can see that the PEG Ratio is above 1.0.
PEG Ratio: FAIL
Read more: http://www.nasdaq.com/reference/dozen/peg-ratio.aspx#ixzz0w08v7wfA
PEG Ratios
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Bullbear Stock Investing Notes
Hi Bullbear,
ReplyDeleteIn your analysis of using PEG ratio to determine buy, hold or sell call on stock, can we also use Price to Book Value to determine is a stock is over or under valued? Is this indicator effective?
Appreciate your feedback.
Thanks.
JR,
ReplyDeleteYour investing decision cannot be based on one parameter. It involves careful study of the investment with regards to its quality, valuation and management. P/E, PEG, P/B and others are good for "valuation" of a stock. It is also important to know that the book value or NTA value is not equal to intrinsic value of a stock.
Click the label in this blog on "book value". There are 10 articles on this and you will find enough information to answer your question.
Regards
Hi Bullbear,
ReplyDeleteThanks for the feedback.