PE/G ratio

Some investment strategies seek growth for its own sake or growth for the sake of growth rather than growth for the sake of value. 


Wall Street wisdom (pardon the oxymoron) adheres to the KISS principle as its highest virtue: Keep It Short and Simple. Most highly prized by brokers are slogans that fit easily on t-shirts and bumper stickers. 


As an example, one popular investment rule of thumb is that for a fully and fairly valued growth stock, the stock's price-to-earnings ratio should be equal to the percentage of the growth rate of the earnings per share of the associated company, i.e. PE = G. As with any such rule of thumb, this is not only superficial but also arbitrary and capricious. 


A common screen based on this heuristic is the ratio of the PE ratio to the EPS growth rate, or the PE/G. In an effort to better fit the historical performance of cyclical stocks and large-cap stocks, ad hoc variations on the PE/G ratio include 

• (1) using an estimated future growth rate instead of an historical growth rate or PE/FG, 
• (2) adding the dividend yield percentage to the EPS growth rate percentage or PE/DG, and 
• (3) adding two time the dividend yield percentage to the EPS growth rate percentage or PE/2DG.