Definition

The Price to PEG Value, or PEG ratio, is a valuation metric that compares a company's price-to-earnings (P/E) ratio to its expected earnings growth rate. It is used to determine the relative trade-off between the price of a stock, the earnings generated per share (EPS), and the company's expected growth.

Formula

PEG Ratio = (Price/Earnings) / Earnings Growth Rate

How to use the valuation method

The PEG ratio is used to assess whether a stock is overvalued or undervalued relative to its growth prospects. A PEG ratio of 1 suggests that the stock's price is fairly valued relative to its growth. A PEG ratio below 1 indicates that the stock may be undervalued, while a PEG ratio above 1 suggests it might be overvalued.

Which industries it work best in

The PEG ratio works best in industries with stable and predictable growth rates, such as consumer goods, technology, and healthcare. These industries often have companies with consistent earnings growth, making the PEG ratio a useful tool for valuation.

Which industries it does not apply to and why

The PEG ratio is less applicable to industries with volatile or unpredictable earnings growth, such as commodities or cyclical industries like energy and materials. In these sectors, earnings can fluctuate significantly due to external factors, making the PEG ratio less reliable.

Summary

The Price to PEG Value is a useful metric for evaluating the valuation of a stock relative to its growth prospects. It is most effective in industries with stable growth and less applicable in sectors with volatile earnings. By considering both price and growth, the PEG ratio provides a more comprehensive view of a stock's value compared to the P/E ratio alone.