How to calculate a PEG ratio

A look at how to find the PEG ratio for individual stocks.

Difficulty: Moderate

Instructions

Things You'll Need:

• calculator
• a stock's earnings figures
• a stock's growth rate

1. Before you are able to find the PEG ratio, you must first know what the price to earnings ratio, or p/e ratio of your stock is.

2. Finding a price to earnings ratio is simple. Simply take the current stock price and divide it by the company's most recent full year earnings per share number. This information is easily found by going to Yahoo Finance or Google Finance. For example, if a company's stock price is $30 a share, and their most recent earnings per share was $2.00, then the stock has a p/e ratio of 15.

3. 
    

   In order to find the PEG ratio, which is the Price to Earnings Growth ratio, we need to use the price to earnings ratio that we just found. Using the example from step 2 we start out with our p/e of 15. To find the peg ratio the p/e of 15 is then divided by the expected annual growth of the company. Let's say that the expected growth of this company is 10% per year. We then take 15/10 to get a PEG ratio of 1.5.

4. What exactly does the PEG ratio measure and what does it tell you? It measures how cheap or expensive a stock is relative to how fast it is growing. A PEG ratio under 1.00 is considered cheap, while a ratio over 2.00 is seen as expensive. The PEG ratio is a very helpful tool to use in valuing a stock's attractiveness!

Tips & Warnings

• Remember that with any valuation ratio, this shouldn't be used alone to buy or sell stocks, but in conjuction with other methods.
• The PEG ratio is dependant on projected earnings numbers, which can prove to be difficult to measure.

[Trader4ever]

on 7/26/2008 Fine article, I'm rating it!
PEG is very important in stock picking. As for me I use even only PE ratio, I take stocks which have "P/E Ratio Better than Industry Average", so these are leaders in their industries. Knowing leading industry and selecting stocks in this industry makes this analysis much more effective! I'm using marketinout.com & yahoo.com services for this. I prefer technical indicators but admit that PE is really important.

[luv2blog]

on 7/25/2008 Excellent! You made it so simple and clear even I understand (and these things typically escapes me!). Thanks!!

[Hapworth]

on 7/24/2008 This gets forwarded to my son!

[JulieMayfield]

on 7/23/2008 Great! Thanks for the info.

[02SmithA]

on 7/23/2008 Julie,

The expected growth of a company is found on analysts estimates pages at Yahoo Finance. For example:

http://finance.yahoo.com/q/ae?s=GOOG

The expected growth rate of GOOG is on the bottom of this page, it is 28.92%.