Price Earning to Growth (PEG) Ratio

Price Earning to Growth (PEG) Ratio is a type of Profitability Ratio that relates the Price Earning (PE) Ratio of a company to its Growth Rate.
PEG Ratio = PE Ratio / EPS Growth Rate
Where,
  • PE Ratio = Market price Per Share / EPS
  • And EPS Growth Rate is the Growth Rate of EPS over a period of time.

Significance and Interpretation

  • Ideally, the Growth Rate of EPS and PE ratio should be the same, then only the share will have the correct price mechanism.
    • PEG Ratio = 1: This indicates that the share is accurately priced in the market, the rate is as per the growth rate. In simple words, it is not overpriced
    • PEG Ratio < 1: This indicates that the share price is low in the market as compared to the growth rate, this attracts the investors as the returns are higher in this case.
    • PEG Ratio > 1: This indicates that the price of the share in the market is high as compared to growth rate, this does not attract the investors as the returns on it will below.
  • From an investor’s point of view, PEG Ratio <1 is the best time to invest in the company and the investment should be sold when the PEG Ratio >1.

Examples

Example 1: Given below are few details of M/S XYZ Ltd., use them an calculate the PEG Ratio for M/S XYZ Ltd.
Particulars Data
PE Ratio 15
EPS in Previous Year Rs. 10
EPS in Current Year Rs. 13
Tax Payable 500000.00
  • Solution:
  • PE Ratio = 15
  • EPS Growth rate = (Change in Value / Value in Previous Year) * 100 = (3/10) *100 = 30%
  • PEG Ratio = PE Ratio / EPS Growth Rate = 15 /30 = 0.5
  • Hence, PEG ratio for M/S XYZ Ltd. = 0.5
  • PEG Ratio of 0.5 indicates that the share is under prices and is a good investment option.
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