Price To Earnings To Growth Ratio, usually the abbreviation PEG is used. It is a term that refers to the ratio of share market price to the earnings per share and earnings growth.
The indicator is based on the P/E ratio and it tries to take into account the future development. Its disadvantage is that it allows for an estimated annual profit growth. This estimate can cause a large divergence from the reality.
PEG = (P/E) / G
- P/E… Price Earnings Ratio
- G… EPS growth
The lower number comes out, the less we pay for future profit growth.
Use of the PEG in practice: The indicator helps an investor to decide whether to invest in certain shares. The literature recommends buying shares of PEG from 0.1 to 0.9, up to 1.5. Values above 1 are traded above its growth potential.
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