PEG Ratio Calculator

Price/earnings to growth ratio, or PEG ratio for short, is a measure that compares the company's stock price with its earnings and expected growth rates. It can be interpreted as the price that investors are willing to pay for $1 of earnings given 1% of the expected growth rate.

Unlike the famous P/E ratio (described in the price earnings ratio calculator), the PEG ratio take the growth rate of the company into account. Hence, it can provide a more well-rounded picture of how attractive investing in a company is. Don't worry if this is not clear, the example below will clearly demonstrate the concept.

Calculating the PEG ratio is not complicated. There are only 5 steps in the process. Let's take Company Alpha with the following reported information as an example:

• Price of stock: $20.00;
• Latest earnings: $15,000,000;
• Number of shares outstanding: 10,000,000;
• Retention rate: 60%; and
• Return on Equity (ROE): 8%.

With this information, we are ready to explain how to calculate PEG ratio:

1. Determine the price of the company's stock.

   This can be done easily as the data is readily available. Search it on Google or get it from financial websites such as Yahoo Finance, Bloomberg, or the Financial Times. In our example, the price of Company Alpha stock is $20.00.

2. Compute the earnings per share (EPS) of the company.

   The most direct way to access this information is to read the company's annual report. We can calculate it as:

   earnings per share = earnings / number of shares outstanding

   In this example, the EPS of Company Alpha is $15,000,000 / 10,000,000 = $1.50.

   Alternatively, you can use the earnings per share calculator.

3. Calculate the P/E ratio.

   Using the stock price and earnings per share, calculating the P/E ratio can be done using the formula below:

   P/E ratio = stock price / earnings per share

   Hence, the P/E ratio in our example is $20.00 / $1.50 = 13.⅓x.

4. Calculate the earnings growth rate of the company.

   Calculating the company's growth rate requires 2 inputs, namely the retention rate and the return on equity (ROE) of the company (explained in the return on equity calculator). The formula to calculate the earnings growth rate is:

   earnings growth rate = retention rate × return on equity

   In this example, the earnings growth rate of Company Alpha is 60% × 8% = 4.8%.

5. Calculate the PEG ratio

   Finally, we can calculate the PEG ratio given the information we have. The PEG ratio formula is shown below:

   PEG ratio = P/E ratio / earnings growth rate

   Thus, the PEG ratio of Company Alpha is 13.33 / 4.8% = 2.778x.

The price/earnings to growth ratio (PEG ratio) is a powerful investment metric that can help you make informed investment decisions. However, a few things are important to keep in mind.

• The PEG ratio takes into account the earnings growth rate

  When comparing the P/E ratio of 2 different companies, it is hard to tell if one P/E ratio is higher because it is overvalued or because investors believe in its future earnings growth. PEG ratio is calculated to solve this exact dilemma. By dividing the P/E ratio by the earnings growth rate, we can now compare the metrics at the same level of growth.

• The PEG ratio does not take into account risks

  Although the PEG ratio considers earnings growth, it still does not take risk into account. For instance, one company may have a lower PEG ratio not because it is undervalued but because it is perceived as having lower risks compared to its peers.

Therefore, it is essential to carry out a more holistic due diligence and investment analysis before making your investment decisions instead of relying on just one particular investment metric.