The PEG Ratio Calculator is a tool crafted to assist in evaluating a stock’s investment potential. To effectively utilize this calculator, it’s essential to input three crucial pieces of information:
Stock Price ($): This figure represents the current market price of the stock you’re examining. It is the price at which the stock currently trades on the market. For example, if a stock’s trading price is $50.00 per share, you should input 50.0 in the ‘Stock Price’ field.
Earnings Per Share (EPS) ($): EPS is a key indicator of a company’s profitability. It is derived by dividing the company’s total profit by the number of shares outstanding. This metric provides a clear picture of the company’s financial health on a per-share basis.
Projected Growth Rate (%): This percentage reflects the anticipated annual growth rate of the company’s earnings. It’s a forward-looking estimate, predicting how much the company’s earnings are expected to increase each year. If, for instance, you anticipate a 10% annual increase in the company’s earnings, enter 10.0 in the ‘Projected Growth Rate’ field.
After entering these values, click the ‘Calculate PEG Ratio’ button. The calculator will then process these inputs and provide you with the Price/Earnings to Growth (PEG) Ratio, displayed in the ‘PEG Ratio’ field.
PEG Ratio Formula
You may be curious about the computation process of the Price/Earnings to Growth (PEG) Ratio. The PEG Ratio builds upon the traditional Price/Earnings (P/E) ratio by incorporating the growth rate of a company’s earnings. This ratio offers a more rounded perspective of a stock’s worth, factoring in the prospective growth in earnings.
Let’s examine the formula:
PEG Ratio = Price/Earnings (P/E) Ratio / Projected Earnings Growth Rate
The Price/Earnings (P/E) Ratio is determined by dividing the stock’s current market price by its Earnings Per Share (EPS). In our PEG Ratio Calculator, you’re prompted to enter the stock price and EPS. The calculator then automatically calculates the P/E ratio.
By dividing the P/E Ratio by the projected earnings growth rate, you get the PEG Ratio. A lower PEG Ratio often indicates that the stock may be undervalued considering its earnings growth, making it a potentially attractive investment. Conversely, a higher PEG Ratio might suggest overvaluation.
PEG Ratio Example
Let’s delve into an illustrative example with a hypothetical company named TechInnovate. Imagine TechInnovate’s shares are currently valued at $100 each. Last year, TechInnovate declared earnings of $4 per share. This calculation yields a Price/Earnings (PE) ratio of 25, derived from dividing the $100 share price by the $4 earnings per share.
At an initial glance, TechInnovate’s PE ratio might appear elevated, potentially indicating that the stock is priced too high relative to its earnings. However, for a more comprehensive assessment, you should also consider the company’s growth prospects. Analysts predict that TechInnovate’s earnings will escalate by 20% annually in the coming years.
Now, let’s compute the PEG ratio. You calculate the PEG ratio by dividing the PE ratio (which is 25) by the projected growth rate (20%). For TechInnovate, this calculation results in a PEG ratio of 1.25 (25 divided by 20).
A PEG ratio of 1.25 suggests that TechInnovate might be reasonably priced, especially when its robust growth rate is considered. While the PE ratio alone portrayed TechInnovate as potentially overvalued, the PEG ratio provides a more nuanced perspective. It indicates that the company’s strong growth potential could vindicate its current stock price, potentially marking it as an appealing investment option. This example underscores how the PEG ratio can offer a more layered understanding of a company’s valuation, particularly for companies experiencing rapid growth.