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A PEG ratio is a financial ratio of a company. The PEG (price, earnings, growth) ratio compares the price/earnings ratio to the growth rate. It can be either historical rates or estimated future rates. A lower ratio is "better" and a higher ratio is "worse".
Ratio
p/e ratio / earnings (or earnings per share) growth in parts-per-hundred (%) (year-over-year trailing or over future years)
Advantages
The usual ratios of earnings, revenues, tangible assets, book value to market cap or capital (shareholders' equity) doesn't tell if a company is "expensive" or really a future growth company. The PEG ratio can perhaps tell something more about if a company is just "expensive" or really have a bright future of growth and expansion.
Disadvantages
The disadvatages is the usual disadvatange of ratios. They don't tell that much. They don't really have the ability to uncover who and which company have really good managers that will be successful in the future. If one would buy a portfolio of ten stocks with a PEG ratio if 0.5 and another portfolio if ten stocks with a PEG ratio of 1.5, there's unfortunately not much that tells if the 0.5 portfolio will outperform the 1.5 portfolio over the next 1, 5, or 10 years.
Trailing
The "trailing" PEG ratio calculated as
Trailing P/E / Earnings Growth (last fiscal year) = PEG ratio
227 / 6 = 38
Future
You will notice that the PEG ratio that Yahoo! has got in their "key ratios" (from Thomson Financial) is not the trailing PEG ratio, it's the famous "future expectations" of "experts" ("5 yr expected") (the numerator and denominator is not mentioned, they are guessed below).
Forward P/E / Future earnings growth = PEG ratio
55 / 21 = 2.59
See also
External links
Data
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