PEG Ratio (Price/Earnings/Growth)

Financial Metrics

In our last financial segment, we outlined the basics of the Price/Earnings, or PE, ratio. We showed how it can and should be used when analyzing a company. The PEG Ratio is very connected to this so if you need a refresher, please reflect back on our prior post.

The PEG Ratio is very useful at analyzing a stock’s price compared to that companies earnings, but unlike the PE Ratio it takes future earnings into account. PEG actually uses PE, as the definition of the actual equation used to find this number is (PE Ratio) / (Annual EPS Growth) = PEG. This growth can be over any given time period, however it is most often used 5 years in the future. Because of this, the PEG is indeed an estimate, as no one knows how the company will actually increase its earnings, but using estimates and forecasts we can obtain…

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