The P/E ratio is calculated as the price per share of the company divided by the earnings per share (EPS), or price per share / EPS. Once the P/E is calculated, find the expected growth rate for the stock in question, using analyst estimates available on financial websites that follow the stock.
For example, let's say you're analyzing a stock that is trading with a P/E ratio of 16. Suppose the company's earnings per share (EPS) have been and will continue to grow at 15% per year. By taking the P/E ratio (16) and dividing it by the growth rate (15), the PEG ratio is calculated as 1.07.
The 'PEG ratio' (price/earnings to growth ratio) is a valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share (EPS), and the company's expected growth. In general, the P/E ratio is higher for a company with a higher growth rate.
PEG ratios higher than 1 are generally considered unfavorable, suggesting a stock is overvalued. Conversely, ratios lower than 1 are considered better, indicating a stock is undervalued.
You can calculate the P/E by taking a stock's current share price and dividing it by its earnings per share (EPS). This number allows you to compare the relative value of a stock against other stocks, as well as determine if the market has priced a stock higher or lower in relation to its earnings.
What Is a Good PEG Ratio? As a general rule, a PEG ratio of 1.0 or lower suggests a stock is fairly priced or even undervalued. A PEG ratio above 1.0 suggests a stock is overvalued.
Valuation Measures
| As of Date: 5/5/2021 Current | 9/30/2020 | |
|---|---|---|
| Trailing P/E | 664.30 | 1.04k |
| Forward P/E 1 | 151.52 | 114.94 |
| PEG Ratio (5 yr expected) 1 | 3.99 | 1.01 |
| Price/Sales (ttm) | 20.87 | 15.94 |
A ratio between 0.5 and less than 1 is considered good, meaning the stock may be undervalued given its growth profile. A ratio less than 0.5 is considered to be excellent.
Currently, Amazon.com has a PEG ratio of 2.25 compared to the Internet - Commerce industry's PEG ratio of 2.16. The company's trailing twelve month (TTM) PEG ratio is the P/E ratio divided by its growth rate over the past 12 months.
How to calculate growth rate using the growth rate formula? The basic growth rate formula takes the current value and subtracts that from the previous value. Then, this difference is divided by the previous value and multiplied by 100 to get a percentage representation of the growth rate.
The result is assigned a rating of 1 to 99, with 99 being best. An EPS Rating of 99 indicates that a company's profit growth has exceeded 99% of all publicly traded companies in the IBD database.
What Does a Negative PEG Ratio Mean? A negative PEG ratio can only mean that either the P/E ratio of the stock is negative, meaning that the company is losing money or that the estimated growth rate for future earnings is negative, indicating that the earnings of the company are expected to decrease in the future.
When calculating PEG ratios for individual stocks, Johnson offers that investors should get expected data from the same source. You can simply find the components to calculate the PEG ratio from a company's earnings reports and financial statements or from websites like Yahoo! Finance or Zacks.
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