Technicals Stability Returns
Peg ratio is computed by dividing PE (Price to Earnings) Ratio by EPS (Earnings Per Share). It indicates the relationship between the company's PE ratio and its growth. PEG ratios stands for Price Earnings Growth ratio and it shows whether the company's stock is undervalued or overvalued.
The PEG ratio is thought to be a good estimate. It was invented by Mario Farina, who wrote about it in his 1969 book, "A Beginner's Guide To Successful Stock Market Investing". It was popularised subsequently by Peter Lynch, in his 1989 book "One Up on Wall Street" where he explained how to use peg ratio.
The formula to derive PEG Ratio
Example of PEG Ratio: For the financial year, ICICI Bank Ltd. has Price to Earnings Ratio of 22.39 and reported EPS Growth as 21.81 %.
The value as per the formula (Price to Earnings Ratio / EPS Growth) is calculated as (22.39 / 21.81%) = 1.02
PE Ratio - The PE Ratio measures the relationship between the company's current stock price and EPS (Earnings Per Share). A PE Ratio indicates how many times investors pay money to get 1 rupee of return. It is one of the important parameters to evaluate whether a company's stock price is overvalued or undervalued.
EPS - Earnings Per Share (EPS) Ratio is a valuation metric measures how much money a company makes on a per share basis. EPS is calculated as net income divided by weighted share outstandings. This metric indicates the company's ability to generate net profits for common shareholders.
Peg ratio is usually seen to be superior to pe ratio since it considers the company's growth, whereas pe ratio just reveals if the stock is undervalued or overvalued.
If a company's PEG ratio is negative, it is due to a negative P/E ratio or negative EPS. In any case, it shows a company that is making losses.
A peg ratio less than one is viewed favorable since it indicates that the stock is undervalued, whereas a peg ratio more than one is considered overvalued.
To understand peg ratio it important to know about pe ratio and eps as it needed to calculating Peg ratio which shows relationship between both.
In general, a low pe ratio is regarded undervalued, while a high pe ratio is considered overvalued, however this is not always the case. Because a good company with fast growth would usually have a high pe ratio. If we merely looked at the pe ratio in this circumstance, we might avoid a high-growth company. In such cases, the PEG Ratio is taken into account.
Peg ratio dosn't considered dividends. If a company pays out exceptionally high dividends, its fair valuation may not be determined by growth or by this criteria. As a result, the peg ratio works well for companies that do not pay dividends or you can say works really well for non-dividend yeild stocks.
Peg ratio is frequently seen to be superior than pe ratio since it takes into account the company's growth, whereas pe ratio just tells if the stock is undervalued or overvalued.
The peg ratio less than one is considered good as it indicates that the stock is undervalued and inverse to this if it is above one then it is considered overvalued. When the PEG ratio is one means neither that stock is overvalued or undervalued or in other words it means the pe ratio is equal to the growth rate.
If there are asset-heavy companies, such as real estate, telecommunications, and so forth, eps might be high or low. If there is a cyclical industry, it might also rise and fall. In these instances, calculating the value of assets is critical, hence the pb ratio is best calculated with pe ratio and peg ratio.
If particular company's PEG ratio is negative then it be the result of a negative P/E ratio or negative EPS. In any scenario, it indicates a company that is making losses.
PEG ratio only indicates the relationship between the company's PE Ratio and growth rate of EPS, so we cannot solely depend on one particular ratio while analysing company. Hence we should other metrics with Peg Ratio such as Dividend Yeild, Dividend Payout Ratio, Net Income or Net Margin, etc.
