Business, Legal & Accounting Glossary
Unlike the P/E ratio, the PEG ratio considers a stock’s earnings growth potential.
To calculate a stock’s PEG ratio, its P/E ratio must be further divided by its projected earnings growth rate. A stock with a PEG ratio less than 1 is considered undervalued (and generally a good buy); greater than 1, overvalued. Of course, a PEG ratio of 1 indicates a stock with a fair value. The PEG ratio is not a firm measurement but simply a guideline, and the PEG ratio should not be used as the sole indicator of a stock’s under- or overvaluation. In addition, a PEG ratio of a stock should only be compared with PEG ratios of stocks from companies in similar sectors. This will ensure consistency during analysis.
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This glossary post was last updated: 6th February, 2020