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PEG ratio definition

Description

Price/earnings to growth (PEG ratio) show the proportion between two ratios. P/E ratio (amount of net income per one share) is divided by ESP (earnings per share) growth. As ESP growth is taken into calculations, this ratio is used as an indicator of the potential market value of the company. Data needed to calculate this ratio is collected from income statement and stock market bulletin.

This ratio is important for the company’s investors (especially while evaluating the company’s possible market value in future), because it helps to consider whether the evaluated shares are overpriced or underpriced.

Norms and limitations

In general, if the value of this ratio in higher than 1, it indicates that the share price is possibly overvalued, and vice versa - if the value is below 1, the share price might be undervalued.

Formula

P/E Ratio calculated by dividing the share price from the net income (earnings) per share.

EPS growth is a percentage that indicates the relative growth of EPS over the two periods (most often for the period of 12 months).