Tipping Point

What is PEG ratio?

After the price-earnings (PE) ratio, the most popular tool for judging whether a stock's valuation is attractive is the price-earnings-to-growth ratio (PEG ratio). The PE is the numerator while the stock's earnings growth rate is the denominator. If the PEG ratio is below one, the stock's valuation is considered reasonable while if it is above one, investors should approach it with caution.

Why use PEG ratio instead of PE?

The PE ratio compares the price of the stock to its earnings per share. A stock's PE is compared with that of other stocks in the same sector and with the stock's own PE in the past. Investors who follow the growth-at-reasonable- price (GARP) investment approach say that even if a stock's PE is high, they would invest in it, if its earnings growth rate is higher. Such investors use the PEG ratio extensively.