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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 , and the company's expected growth.
Stock B is trading at a forward P/E of 30 and expected to grow at 25%. The PEG ratio for Stock A is 75% (15/20) and for Stock B is 120% (30/25). According to the PEG ratio, Stock A is a better purchase because it has a lower PEG ratio, or in other words, its future earnings growth can be purchased for a lower relative price than that of Stock B.
PEG ratio: Prospective PE ratio / prospective average earnings growth: Most suitable when valuing high growth companies; Requires credible forecasts of growth; Can understate the higher risk associated with many high-growth stocks; Dividend yield: Dividend per share / share price: Useful for comparing cash returns with types of investments
In corporate finance, [1] [2] [3] the present value of growth opportunities (PVGO) is a valuation measure applied to growth stocks. It represents the component of the company's stock value that corresponds to (expected) growth in earnings .
The company's PEG ratio is low. A Price/Earnings/Growth rate below 1 means the PE ratio is less than the growth rate. An excellent stock at a fair price is more likely to be undervalued than is a poor stock at a low price, according to Charles Munger, the Harvard-educated partner of Buffett. An excellent stock continues to rise in value over ...
The book provides an insight into his investing approach. He popularized the idea of "Growth at a reasonable price" (GARP). He used the ratio PEG (PE ratio divided by per share growth rate) as a metric. He regarded PEG ratio of 1.0 or lower to be an indicator of inherent value. He preferred stocks with sustainable growth. He examined the ...
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The PEG ratio [4] is a special case in the SPM equation. If a company does not pay dividends, and its risk adjusted discount rate is equal to 10%, SPM reduces to the PEG ratio: If a company does not pay dividends, and its risk adjusted discount rate is equal to 10%, SPM reduces to the PEG ratio: