The PEG ratio is widely used to determine a stock’s potential value while taking into account earnings growth. It is a projection rather than an actual figure. Many prefer PEG to the as an indicator of a value, because it also takes growth into account.
This is because using only the P/E ratio can make high-growth companies appear overvalued compared to others. Dividing the P/E ratio by the PEG rate produces numbers that make it easier to compare companies that have different growth rates.
The formula for calculating the PEG is:
The smaller the number, the better the investmentInvestment is the commitment of money or capital to purchase... More prospects, because higher earnings are expected in the future and the company could be undervalued. For a stock traderWhat is a trader? A trader is a person who buys and sells... More, the PEG is important because investorsWhat are value stocks? A value company is a company that app... More are usually more concerned about the future than the past.
However, be aware that because this ratio produces projected figures it is not accurate and should only be used as an indicator. It is also important to know which time period is being used for the calculation as this can vary across different companies, which may use one year, five years or even ten years.
