Like the P/E Ratio, the PEG Ratio is used to get a better understanding of whether or not a company’s stocks is overpriced, underpriced, or just right. The PEG Ratio uses the P/E Ratio of a company, and compares it with that company’s annual growth rate. If a company’s stock is fairly priced, then it’s P/E Ratio should equal it’s annual growth rate.
How to calcualte the PEG Ratio – To calculate the PEG Ratio of a company, you’ll first need to know the P/E Ratio of that company. I wrote an article called “The P/E Ratio Explained” which shows you how to calculate or find a company’s P/E Ratio. After you have the P/E Ratio, you’ll need to find the company’s annual growth rate. The annual growth rate will be in percentage form, and you can find it in the company’s annual report. But thanks to the internet we don’t have to calculate the PEG Ratio ourselves. Just go to Yahoo Finance, type in the ticker symbol of the company you’re researching, and within seconds you’ll see a whole bunch of ratios for that company including the PEG Ratio.
How to use the PEG Ratio – The PEG Ratio of a company will be between 0 and 5. The lower the PEG Ratio, the better. A PEG Ratio of 2 or below is considered excellent. A PEG Ratio of 2 to 3 is considered OK. A PEG Ratio above 3 usually means that the company’s stock is over priced. As with the P/E Ratio, never make a decision to buy a stock based soley on the PEG Ratio. Always throughly research a stock before making the decision to buy.