PEGY Ratio

Categories: Company Valuation

See: Price-to-Earnings-to-Growth and Dividend Yield Ratio.

Related or Semi-related Video

Finance: What is Price-to-earnings-to-gr...5 Views

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Finance Allah shmoop what is priced toe earnings to growth

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or a peg ratio You know what the P E

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ratio is right And if you don't I'll check out

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our fine opus on said Subject Here it's him up

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So price here's build a bore Stock trading at forty

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bucks a share It had net income or earnings last

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year of two bucks a share in trades at yes

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twenty times earnings So that's a P and in hee

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price and in earnings there it trades at twenty times

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earnings Um yeah So what does that mean Well if

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it held the earnings flat and basically all of its

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earnings was cash earnings Not like some fancy accounting trick

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Well if earnings were flat for twenty years well the

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company would have made back all of its valuation in

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cash profits and everyone would yawn right Twenty years at

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two bucks a year twenty times two is forty right

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Well that company would have paid up five percent cash

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return yield Right Two bucks in earnings over forty bucks

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a share to over forty in California and in Texas

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is five percent So is that a good return about

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return Was there a lot of risk in that number

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Growth shrinkage Wealth in a peg ratio Earnings growth is

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taken into consideration when evaluating the ratios of a stock

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So twenty times earnings is kind of a ho hum

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multiple But this company has no growth so that twenty

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times is probably a pretty high multiple as a multiple

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You know all things considered like twenty years a long

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time to get all your money back What if earnings

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were doubling each year for the next five years Like

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earnings went from two to four to eight to sixteen

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to thirty two bucks a share Well then twenty times

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earnings was ludicrously cheap Growth was one hundred percent versus

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that zero percent where twenty times earnings Look you know

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decent Well the basic idea and this one is coined

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by Peter Lynch the famed portfolio manager who brought Fidelity

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to fame Is that a peg ratio of one means

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that a stock is basically fairly priced that is P

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E ratios need contexts specifically the context of earnings growth

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The formula takes the P E ratio say it's a

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twenty and then puts it over the annual earnings per

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share growth number and note that it's per share not

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just overall company earnings Like if a company grew earnings

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by acquiring for stock a lot of competitors well it's

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share count would balloon While it's earnings grew fast as

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well but likely the dilution and suffered would mitigate most

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of the upside in earnings growth So on our twenty

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times earnings number a company with no growth gives us

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a peg ratio of twenty over zero which is an

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undefined number But peg ratio is all about how expensive

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the price to earnings ratio is relative to the growth

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of the company Wow we did not see that plot 00:02:45.65 --> [endTime] twist coming yellow

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