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The next measurement to look at when reviewing the true value of a stock is the price/earnings growth ratio. This is a measure of whether a stock is underpriced or if it has a good value attached to it. It could suggest that the stock is a huge bargain depending on the results you discover.
This is a measurement can be calculated by the following equation:
Let’s say that a business has a share price of $50. The EPS for that company last year might have been $4. That total could have gone up to $6 this year. Therefore, you will calculate the P/E ratio by dividing 50 by 6 to arrive at 8.33. Now, divide the earnings by taking 6 divided by 4 while subtracting it by 1. This would give you 0.5. This is then expressed as a percent, which is 50 percent - the earnings per share growth is 50%. Dividing 8.33 by 50 equals a PEG of 0.166.
The PEG in this sample might sound minimal, but the company stock is trading at a dramatic discount when compared with how the stock is growing. Therefore, people are paying less for a stock of a company that is starting to grow. Over time, the value might be a great deal thanks to the company appearing to be more stable.
The PEG gives you an idea of what to expect from a stock that you could hold for a while. It indicates the upward trend a stock might have. It would suggest you hold onto a stock with a favorable PEG for a little longer. You can also save the stock as a favorite for day-trading as you could revisit that stock several times a day to make various added trades.
Use Historical Data
The best way to work with the PEG is to use as much historical data as possible. The example cited focuses on the change in the value of a stock over the past year. While that read-out might be useful, you will need to look into more historical information relating to the PEG to get a clear idea of how it is evolving.
You can calculate the PEG as it was in 2013, for instance. You can measure the earnings per share growth from 2012 to 2013 and see how that compares with the stock from the latest date. After that, you can use the same measurement but for the growth from 2015 to 2016 with the stock value from that later year to see if the PEG is changing.
A stock with a rising PEG is one that more people are starting to buy. As the stock rises and the business grows, people become more aware of what is available. They will start to invest in this particular stock.
