May 272017

The price/earnings to earnings growth, or PEG, ratio is used as a rule of thumb to consider basic value while taking earnings growth into account. You get it by dividing a stock’s p/e by the annual growth rate of its earnings per share. The lower a PEG the better, as it means a stock is cheap relative to its potential earnings growth. Thus firm A, a flashy biotech, might have a p/e of 100, but a growth rate of 50%, giving it a PEG of two, while firm B, a solid support services group with a p/e of ten and a growth rate of 7% has a PEG of 1.4. On the face of it, firm A seems more exciting, but the PEG ratio shows that in risk and reward (price and growth) terms, it is the more expensive.

More on banking and finance terms tomorrow, so please come back for more on what the meaning is of words like PEG ratio.

Example of PEG ratio in use?

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