Use PEG Ratio Instead of P/E Ratio

In my previous post, I mentioned P/E ratio is meaningless unless you use it to compare to it's own historical trend. If you want to quickly evaluate a company (whether it is undervalued or overvalued), you can use PEG ratio instead.

What is PEG Ratio?

PEG Ratio = PE Ratio / Projected Earning Growth Rate

When PEG Ratio > 1, company is overvalued. When PEG ratio < 1, company is undervalue. For example, if a company P/E ratio is 20, a fairly valued company should have 20% projected earning growth rate. If the projected earning growth is 10% then PEG ratio is 2. 

PEG ratio 1 is not practical. What I find out is an undervalued company (based on intrinsic value) usually has PEG ratio < 2. 

Usually PEG ratio is not provided in the website and you need to calculate your own. For analysing stock quickly, I look at the P/E ratio and projected growth rate (which I get it from SimplyWall.St). If the growth rate more than half of the P/E ratio, this company is undervalued. For example above, P/E ratio is 20, I look for growth rate more than 10%. 

You can also use this PEG ratio to compare to other companies (which is more accurate than P/E ratio). 


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