07.07.2019
AAKASHAYA PATRA SEVEN STAR SMART EDUCATION SERIES PART – 15
:
PEG
ratio
The
'PEG ratio' (price/earnings to growth ratio) is a valuation
metric for determining the relative trade-off between the price of a stock, the earnings
generated per share (EPS), and the company's expected growth. ... Thus, using
just the P/E ratio would make high-growth companies appear overvalued relative
to others.
ü PEG ratio value of 1
represents a perfect correlation between the company's market value and its
projected earnings growth. PEG ratios higher than 1
are generally considered unfavorable, suggesting a stock is overvalued.
ü While a low P/E ratio may make a
stock look like a good buy,
factoring in the company's growth rate to get the stock's PEG ratio may tell a
different story. ... When a company's PEG exceeds 1.0,
it's considered overvalued while a stock with a PEG of less than
1.0 is considered undervalued
You can calculate the
PEG ratio using a 2 step process.
ü Step 1: Calculate the P/E Ratio. P/E ratio is
generally calculated as the Stock Price / Earnings per Share. ...
ü Step 2: Calcuate the PEG Ratio. Next, we
divide the P/E ratio calculated above with the expected Earnings growth rate.
The P/E ratio is calculated
by dividing a company's current stock price by its earnings per share (EPS). If
you don't know the EPS, you can calculate it by subtracting a company's
preferred dividends paid from its net income, and then dividing the result by
the number of shares outstanding.
Price-to-Earnings Ratio. The
price-to-earnings ratio helps
investors determine the market value of a stock compared to the company's
earnings. ... The P/E ratio is important because it provides a measuring stick for comparing
whether a stock is overvalued or undervalued.
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