Price earnings growth factor

 

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Price earnings growth factor

The PEG of a company is calculated by dividing its prospective P/E ratio by the estimated future growth rate in earnings per share of the company. So to calculate a PEG, you first need to calculate its P/E ratio.P/E = current share price divided by earnings per shareA company with a share price of 100p and earnings per share of 5p has a P/E ratio of 100/5 = 20.By itself the P/E ratio is a useful ratio because it shows how many times the current earnings the shares cost - in a sense, how many years you would have to wait to get your money back if the company paid out all its earnings to shareholders. But the limitation of the P/E ratio is that it looks at historical information and does not relate the price of the shares to its future performance. The PEG ratio builds in that extra layer of sophistication.Using the example of the same company, imagine that the consensus brokers' forecast for its future earnings growth rate is 15%.PEG = P/E divided by estimated future growth rateFor this company, the PEG would be 20 divided by 15 = 1.33.According to Jim Slater, the investor who popularised the use of PEG's as a stock share selection tool, a share with a PEG of 1 or lower is attractive. Put simply, the lower the PEG, the less you are being asked to pay for estimated future earnings. Jim Slater did not recommend use of the PEG as the only criteria of share selection. There are plenty of other fundamental checks that have to be made too.Note that the estimated future earnings are a critical part of the PEG calculation, and that if the forecasts made by brokers are wide of the mark, the PEG ratio will be unreliable. Because of this danger, most advocated of PEG's recommend using consensus forecasts, rather than the forecasts of any single broker/analyst.



Similar Matches

Earnings before interest, taxes, and depreciation (EBITD)

Earnings before interest, taxes, and depreciation (EBITD)

A financial measure defined as revenues less cost of goods sold and selling, general, and administrative expenses. In other words, operating and nonoperating profit before the deduction of interest and income taxes. Depreciation expenses are not included in the costs.


Net relevant earnings

Net relevant earnings

A person's pensionable income (that is, income from employment) plus taxable benefits in kind, less any allowable business expenses but before deduction of personal allowances. For self employed people these are taxable profits less capital allowances or losses from previous years.


Normalized earnings

Normalized earnings

Earnings that have been adjusted in order to take into account the effect of cycles in the economy.


Earnings retention ratio

Earnings retention ratio

Plowback rate.


Normalised earnings

Normalised earnings

See 'adjusted earnings'.


Further Suggestions

Earnings yield
Earnings response coefficient
Pretax earnings or profits
taxable earnings
price earnings ratio (P/E ratio)
Earnings before interest, taxes, depreciation, and amortization (EBITDA)
earnings yield
earnings per share
retained earnings
Quality of earnings
lower earnings limit
Earnings before interest after taxes (EBIAT)
Retained earnings
Earnings
Accounting earnings
upper earnings level
Earnings price ratio
Primary earnings per (common) share
State Earnings Related Pension Scheme
adjusted earnings
Earnings before taxes (EBT)
Earnings
earnings factor
Fully diluted earnings per shares
earnings


 
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