Price/Earnings to Growth (PEG) Ratio
The Price/Earnings to Growth (PEG) ratio serves as a key valuation metric, gauging the equilibrium between a stock's price, earnings per share (EPS), and the anticipated growth of the company. It provides insights into a stock's potential value relative to its earnings growth.
What it Means:
PEG ratio goes beyond the traditional Price/Earnings (P/E) ratio by factoring in the company's growth prospects. A lower PEG ratio may indicate an undervalued stock, while a higher ratio may suggest overvaluation. It aids investors in assessing the trade-off between price, earnings, and growth potential.
How to Calculate:
The PEG ratio is calculated by dividing the P/E ratio by the annual earnings growth rate. Mathematically, PEG Ratio = P/E Ratio / Annual Earnings Growth Rate. A PEG ratio less than 1 is often considered favorable, indicating potentially undervalued stock.
Why Measure:
Measuring the PEG ratio provides a holistic view for investors, allowing them to make informed decisions based on a company's growth prospects. It aids in identifying stocks that may offer a balanced blend of value and growth potential.
Examples:
Imagine an Indian startup with a P/E ratio of 20 and an expected annual earnings growth rate of 15%. The PEG ratio would be 20 / 15 = 1.33. Investors interpreting this ratio would assess whether the stock is reasonably priced concerning its growth potential.
Understanding and leveraging the PEG ratio in the Indian startup ecosystem empowers founders and investors alike, offering a nuanced perspective on valuation that goes beyond traditional metrics.