Price-earnings-growth-ratio
The PEG ratio ( price-earnings ratio -Wachstums ratio; Engl .: price / earnings to growth ratio ) serves as a measure for evaluating the shares of growth stocks . As an abbreviation, the English PEG has also become common in German.
To calculate the PEG, the price / earnings ratio is set in relation to the mean, long-term expected earnings growth. An estimate for the next three to five years is customary.
As a rough estimate: If the PEG is less than 1, the share is considered undervalued, if it is greater than 1, it is overvalued.
example
A stock is valued at P / E 10, and analysts expect the company to grow 20% a year in earnings. Then this share has a PEG of 0.5 and should double in price by the time it reaches its fair value .
criticism
Future earnings growth cannot always be derived from past numbers. Companies that make good economic times in the impression of growth stocks, can relax in the recession as cyclical turn. Before applying the PEG ratio, it is therefore necessary to check how plausible it is that growth will continue. For example, mechanical engineering companies and their suppliers, raw material and chemical stocks or service companies for corporate customers are rarely growth stocks.
Successful, young companies often go through a particularly high-growth phase with annual increases in the mid double-digit percentage range. It must be checked whether the company to be valued is in such a phase and whether a slowdown in growth dynamics can be expected in the medium term.
Another difficulty with the PEG rate is its ignorance of market interest rates , which has a significant impact on the value of stocks.