Explain the PEG ratio?

This is an acronym for Price/Earnings to Growth Ratio, which takes the P/E ratio and factors for how quickly the company’s EPS will increase.
A stock with a high PEG ratio is one that is quickly expanding. The P/E and PEG ratios of a finely valued company will be the same.

So, if a firm’s P/E ratio is 20 and its PEG ratio is likewise 20, some may say that the stock is overpriced since another company with the same EPS has a lower P/E ratio, but because the PEG rate is 20, it also implies that it is expanding quickly.

PEG Ratio may be used to express the extent to which price that an investor is willing to pay or a company, is justified by the growth in earnings. The assumption with high P/E stocks is that investors are willing to buy at a high price because they believe that the stock has significant growth potential. The PEG ratio helps investors determine the degree of reliability of that growth assumption.

Interpretation: “If P/E ratio of any company that is fairly priced, will be equal to growth rate”

  • If the PEG ratio is 1, it is fairly priced.
  • If the PEG ratio is below 1, it is undervalued.
  • If the PEG ratio is above 1, it is overvalued.

The PEG is a great tool to quickly scan for high growth stock at a fair price.You should never scan company based on a single ratio without doing your homework.You have to deploy other quantitative factors to consider for taking decision.