How to Determine Stock PEG
The Price/Earning to Growth Ratio or PEG is used to determine whether a stock is a sound investment based upon its future earning potential as compared to its current growth. The ratio builds upon the P/E ratio by suggesting that investors examine whether the potential of a lower-earning stock makes it a better purchase than a stock that has already demonstrated growth. To determine the PEG of a stock, you will need to know the market value, the earning per share, and the projected growth of the stock in question.
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Instructions
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Divide the current market value of the stock by the earnings per share (EPS) or the amount the stock has earned in the past year. For example, if the stock has a value of $25 per share and has increased in value by $2 over the past twelve months, the equation would be 25/2 with the answer being $12.50. The result is your Price-Earnings Ratio.
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Obtain the projected growth of the stock from the company that is selling the stock. This number will be listed as a percentage. For example, a company might list its projected growth to be 20 percent over the next year.
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Divide the Price-Earnings Ratio by the projected growth. Using the examples above, you would divide 12.5 by 20. Don't enter the projected growth into your equation as a percentage as it will alter the results. The ratio we are given is the PEG. In this case the PEG is .625.
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Determine if the stock has been undervalued or overvalued. A PEG value greater than one indicates an overvalued stock while a value lower than one indicates the stock has been undervalued and may be a wise investment.
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Tips & Warnings
Determining the P/E and the estimated growth for several years can give you a better idea on how well the stock is expected to perform when calculating the PEG.
