PEG Multiple (Price Earnings to Growth)

Aug. 27, 2012 - PRLog -- PE Multiple of 8x for Company A and 17x for Company B cannot make it clear it that which company is cheaper or expensive, as it does not account for growth prospects. Company B which looks expensive at 17x current PE multiple, might be cheaper to A on forward year 4th multiple. PE multiple fails to account for the growth prospects, as Company B might be in startup stage while A might be in stable/matured stage. So we calculate PEG multiple.

PEG multiple, a valuation metric, is used for determining the relative trade-off between the price of a stock, the earnings generated per share (EPS), and the company's expected growth. PEG is widely used for comparing companies with different growth rates; say comparing the companies in early growth stage with matured companies.

PEG = PE ÷ EPS Growth for next 4 years (CAGR)

Like the P/E Multiple, the PEG Multiple is used to get a better understanding of whether or not a company's stocks is overpriced, underpriced, or just right. If it is just like the P/E Multiple, then why analysts or investors prefer PEG to P/E? Investors may prefer the PEG multiple over P/E because it explicitly puts a value on the expected growth in earnings of a company. PEG multiple normally suggests whether a company's high P/E multiple reflects an excessively high stock price or is a reflection of promising growth prospects for the company.



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Source: "Investment Banking: The First Step", 2nd Edition, Chapter 5 (www.theIbclub.com)

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