The PEG (Price / Earnings to Growth, or also known as Price / Earnings to Growth) ratio shows the years of benefits or the time required for a company to recover the money it invested in buying its shares if the profit from the acción it would have been constant.
How is the PEG ratio calculated?
In order to calculate this ratio we are based on:
PEG= Precio por acción / Beneficio Neto que nos ofrece la acción
An example to understand this: a company quotes shares at 100 euros, and its profit per share of 5 euros. Your PEG would be 20 (the result of dividing 100 by 5).
What does the PEG ratio indicate?
Once the concept is known, the question we can ask ourselves is what can we compare this ratio with. Well, the PEG ratio is usually compared with other PEG ratios of past seasons or of another nature. Specifically, it should be compared with: the historical average PEG of the market, 15 times; the historical average PEG of the action; the average PEG of the market; the average PEG in your industry.
Also, the PEG ratio can tell us how much a stock is or is not valued on the stock market: low ratios tell us that the stock is undervalued; high ratios that is overvalued. However, this does not work for extreme situations where, for example, it is used to compare low growth sectors.
Of course, it is recommended and it is useful to be able to use it in those sectors in which companies are growing rather than decreasing.
As advantages we can say that it is a very easy ratio to calculate (only two numbers are divided) and that it offers us data that, at first glance, is very easy to compare and offers us very relevant data on the valuation of the company.
As disadvantages, we can emphasize its questionable validity in extreme situations, in addition to the fact that, as a ratio that it is, the conclusions that it advances us cannot be entirely exact or comparable with those of other analysts