Calculate the Price/Earnings to Growth (PEG) ratio for a stock.
Understanding the PEG Ratio
The Price/Earnings to Growth (PEG) ratio is a valuation metric used by investors to assess a stock's value. It is a popular enhancement of the P/E ratio, as it incorporates a company's expected earnings growth rate. The PEG ratio is calculated by dividing the company's P/E ratio by its expected annual EPS growth rate.
The Formula
The core formula for the PEG ratio is:
PEG Ratio = (P/E Ratio) / (EPS Growth Rate %)
Where:
P/E Ratio: This is the Price/Earnings ratio of the stock, calculated as the current share price divided by the earnings per share (EPS) over the last twelve months.
EPS Growth Rate: This is the expected annual growth rate of the company's earnings per share. This is typically a forward-looking estimate, often provided by financial analysts or company management. It's important to note that this growth rate should be expressed as a whole number (e.g., 10 for 10%, not 0.10).
How to Interpret the PEG Ratio
The PEG ratio helps investors determine if a stock is overvalued, undervalued, or fairly valued relative to its growth prospects. General guidelines for interpretation are:
PEG Ratio < 1: The stock may be undervalued. This suggests that the market is not fully pricing in the company's expected earnings growth, potentially offering a buying opportunity.
PEG Ratio = 1: The stock is considered fairly valued. The P/E ratio is in line with the expected growth rate.
PEG Ratio > 1: The stock may be overvalued. This indicates that the market is expecting high growth, and the current stock price might be too high relative to that expected growth.
It's important to note that these are general guidelines, and the "ideal" PEG ratio can vary significantly by industry, market conditions, and the company's stage of development.
Why Use the PEG Ratio?
The PEG ratio offers several advantages over simply looking at the P/E ratio:
Contextualizes Growth: It provides context for a high P/E ratio. A company with a high P/E might be justified if it also has a very high growth rate. The PEG ratio helps to normalize this.
Compares Different Companies: It can be useful for comparing companies within the same industry that have different growth rates.
Highlights Potential Mispricings: It can identify stocks that may be overlooked due to a seemingly high P/E but have strong underlying growth prospects, or vice-versa.
Limitations of the PEG Ratio
Despite its usefulness, the PEG ratio has limitations:
Reliance on Estimates: The growth rate used is an estimate, and actual growth may differ, leading to inaccurate conclusions.
Growth Rate Definition: Different sources may use different methodologies or timeframes for projecting growth rates.
Not Universally Applicable: It's less effective for companies with inconsistent earnings, cyclical businesses, or those in industries with very low or negative growth.
Calculator Usage
Use the calculator above to quickly compute a stock's PEG ratio. Simply input the company's current Earnings Per Share (EPS), its Price/Earnings (P/E) ratio, and its expected annual EPS growth rate (as a percentage). The calculator will then provide the PEG ratio for your analysis.
Example Calculation
Let's consider a hypothetical company with the following metrics:
Current Stock Price: $50.00
Earnings Per Share (EPS) (TTM): $2.50
Price/Earnings (P/E) Ratio: 20.0 (calculated as $50.00 / $2.50)
Expected EPS Growth Rate: 10%
Using the calculator:
Enter 2.50 for Earnings Per Share (EPS).
Enter 20.0 for Price/Earnings (P/E) Ratio.
Enter 10.0 for EPS Growth Rate (%).
The PEG ratio would be calculated as:
PEG Ratio = 20.0 / 10.0 = 2.0
In this example, a PEG ratio of 2.0 might suggest the stock is overvalued, assuming a typical benchmark of 1.0.
function calculatePegRatio() {
var eps = parseFloat(document.getElementById("eps").value);
var peRatio = parseFloat(document.getElementById("peRatio").value);
var growthRate = parseFloat(document.getElementById("growthRate").value);
var resultDiv = document.getElementById("result");
resultDiv.style.display = 'block'; // Make sure the result div is visible
if (isNaN(eps) || isNaN(peRatio) || isNaN(growthRate)) {
resultDiv.innerHTML = "Please enter valid numbers for all fields.";
resultDiv.style.backgroundColor = "#dc3545"; // Error color
return;
}
if (growthRate <= 0) {
resultDiv.innerHTML = "EPS Growth Rate must be positive for a meaningful PEG ratio.";
resultDiv.style.backgroundColor = "#ffc107"; // Warning color
return;
}
var pegRatio = peRatio / growthRate;
// Display the result
resultDiv.innerHTML = pegRatio.toFixed(2) + "PEG Ratio";
resultDiv.style.backgroundColor = "var(–success-green)"; // Reset to success color
// Add interpretation based on general rules
var interpretation = "";
if (pegRatio < 1) {
interpretation = "Potentially Undervalued";
} else if (pegRatio === 1) {
interpretation = "Fairly Valued";
} else {
interpretation = "Potentially Overvalued";
}
resultDiv.innerHTML += "" + interpretation;
}