The PEG ratio is a valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share (EPS), and the company's expected future growth. The PEG ratio is calculated as:
PEG = PE Ratio / % EPS Growth
In SIG, the PEG ratio used the Current PE ratio and the projected EPS Growth Rate from the Graph Tab. SIG also calculated a "Projected" PEG ratio. This ratio us the Projected PE ratio (the current price divided by next year's expected Earnings Per Share). Obviously, the calculation of the PEG Ratio will be affected by the EPS Growth rate you enter on the Graph Tab.
The projected PE ratio and the Projected PEG ratio becomes more relevant once a company completes its second fiscal quarter. Wall Street tends to value a stock based on the next year's earnings once the company is in the third and fourth fiscal quarter.
Understanding the PEG Ratio
A lower ratio is "better" and a higher ratio is "worse."
A PEG ratio that gets close to 2 or higher is generally believed to be expensive.
That is, the price paid appears to be too high relative to the estimated future
growth in earnings.
It is generally accepted that a PEG ratio of 1 represents a reasonable trade-off
between cost (as expressed by the P/E ratio) and growth. This would indicate
that the stock is reasonably valued given the expected growth. If a company
is growing at 30% a year, for example, then the stock's P/E could be as high
as approximately 30. PEG ratios between 1 and 2 are therefore considered to
be in the range of normal values.
The PEG Ratio is similar to Relative Value, although Relative Value does not include the EPS growth rate as part of its calculation. Investors using SIG for analysis should consider the PEG ratio as an additional data factor to validate their analysis results.
The PEG ratio is only a rule of thumb despite its wide use, and has no accepted underlying mathematical basis; the PEG ratio's validity at extremes in particular (when used, for example, with low-growth companies) is highly questionable. It is generally only applied to so-called growth companies (those growing earnings significantly faster than the market).