Price To Earnings Growth Ratio (PEG)

This ratio tries to determine whether a share price is cheap or expensive compared to predicted earnings. It compares a company's current price/earnings ratio (PER) to the expected earnings growth rate. For example if a company's PER is 15, with last years earnings of 10p per share, this years earnings of 12p per share (i.e an earnings growth of 20%) then the PEG = 15/20 or 0.75.

This ratio was developed by investor Jim Slater for spotting growth companies. His interpretation was that if the PEG was about 1.0 the share price was fair value, above 1.0 expensive, and below 1.0 cheap. So from an investers point of view the lower the PEG the better.

However if the PER on which the calculation is based is less than 3 this may indicate the company is in difficulties and therefore a much higher risk. Also if you rely on analysts forecasts for your earnings figuers you should note that many analysts aren't very good at forecasting. As with most indicators you should look for supporting evidence before commiting money to an investment based on PEG.

What to do if you need more help

If you need more help with your specific commercial loan, mortgage or insurance requirement please speak to a professional financial adviser.

We hope you found this information useful.

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