Curious Cat Investing Dictionary: PEG ratio

PEG ratio (PE to Growth ratio) - price earning ratio divided by earnings growth rate. Both the pe ratio and the growth rate can be different based on how it is calculated. The PE ratio can be for the past year, forward pe ratio, etc.. And the growth rate can be the growth rate for the last 5 years (most common), 3 years, 1 year or even projected earnings growth rate.
Even with the problems with how it is calculated the theoretical basis of placing value on this ratio is sound. While in practice the ratio has to be treated with skepticism the value of providing a quick ratio that can compare not just current earning power but also factor in future growth makes the PEG ratio a valuable measure.
Often a value above one is seen as high and below one is seen as low (a good buy) however in reality this is overly simplistic.

  • Earnings Growth Rate - the annual growth rate of earning for a company. It can be calculated in different ways but the most common is to calculate the average annual growth rate over the past 5 years excluding extraordinary items (compounded annually).
  • PEG Ratio article from MoneyChimp
  • The Limits of PEG Ratio by Diversity Investment Group

Curious Cat Investing Library
Dictionary: PE ratio, Dollar Cost Averaging , Balance Sheet
Topics: China - Economics - Real Estate - Trading
Great Investors Focus: Darvas - Livermore - O'Neil - Soros
Authors: Levitt - Schwager Investment Bookstore