PEG Ratio

The PEG ratio was popularized by The Motley Fool, as well as many other financial experts and professionals.

Peter Lynch says it best in One Up on Wall Street: "The p/e ratio of any company that's fairly priced will equal its growth rate."

What Lynch was trying to say is:

P/E = G where P/E is the stock's P/E ratio, and G is its earnings growth rate.

Although the PEG ratio looks simple enough, you need to keep in mind that it is nothing more than a general rule of thumb. In other words, this is not the law in any way, shape, or form.

The question is: how accurate is the PEG ratio? In some cases, this rule of thumb is way off, but in others it can be quite helpful. For this reason, it is important to use the PEG ratio, but not to rely solely on the results.

Annual Growth
Earnings Growth Rate:	%
Results
Fair P/E Ratio
PEG Approximation:
Actual Value (via Discounted Cash Flows):

The assumptions include that specified growth will remain the same for five years, and then revert to zero; and that a discount rate of 11 percent is used.

If you plan on using the PEG ratio, make sure that you find a company that appeals to you and then use this formula to ensure that the price is reasonable based on your budget.

Do not make the mistake of misusing the PEG ratio. Many people use earnings from back to back years from an annual report, and think that it will offer an accurate calculation.

Dangerous Calculator
This year's annual earnings per share:	$
Annual earnings per share from year(s) ago:	$
Results
Annualized Earnings Growth Rate (over this period):	%
PEG Approximation for Fair P/E Ratio:

Remember, each year's earnings are unique and not necessarily recurring.