What is the PEG indicator?

Views 29KAug 9, 2023

Key points

The ● PEG index (price-earnings ratio to earnings growth ratio) is divided by the company's price-to-earnings ratio divided by the company's earnings growth rate.

As a stock evaluation indicator, ● PEG is more comprehensive than PE because it also takes into account the future growth rate of the company's earnings per share.

When the PEG ratio of ● is 1, it usually means that there is a good correlation between the company's market value and its projected earnings growth, and the future performance has good growth.

Understand PEG metrics

The PEG index refers to the company's price-to-earnings ratio (PE) divided by the company's compound growth rate of earnings per share for the next three or five years.

PE only reflects the current value of a stock, while PEG links the current value of the stock to the future growth of the stock.

The advantage of using the PEG index to select stocks is to compare the price-to-earnings ratio with the growth of the company's performance, and the key is to make accurate expectations of the company's performance.

Investors are generally used to using the price-to-earnings ratio to evaluate the value of stocks, but when they encounter some extreme cases, the maneuverability of the price-earnings ratio is limited, for example, there are many stocks in the market that are much higher than the average price-earnings ratio of the stock market. even as high as a hundred times the price-to-earnings ratio of stocks, it is impossible to use the price-earnings ratio to evaluate the value of such stocks.

But if you compare the price-to-earnings ratio with the company's performance growth, those ultra-high price-to-earnings ratio stocks look reasonable, investors will not feel too risky, this is the PEG indicator.

Although PEG is not as popular as price-to-earnings and price-to-book ratios, it is also very important.

Limitations of PEG

There are several things to consider when using PEG indicators as part of stock analysis.

Both the numerator and denominator of PEG value are related to the prediction of future earnings growth, which may go wrong, so it is difficult for investors to fully predict when a company's growth will slow down or accelerate.

In addition, be cautious when using PEG ratios to analyze value stocks or slow-growing companies.

If a company has a price-to-earnings ratio of 15 times and has been growing at 5% a year for decades, its price-to-earnings ratio of 3.0 may look expensive.

However, for investors looking for security and stability, the company may still have reasonable investment value given its steady pace of development.

Disclaimer: The above content does not constitute any act of financial product marketing, investment offer, or financial advice. Before making any investment decision, investors should consider the risk factors related to investment products based on their own circumstances and consult professional investment advisors where necessary.