Ask Colin

Is the PEG ratio better than the PE ratio in your approach?

The PE ratio is used in my approach as an indicator of value. Thus, a company with a low PE ratio may be undervalued by the market. It could also be a company underperforming or expected to underperform. I only use the PE ratio as a screen to whittle the large number of available stocks down to a manageable number to work on.

The PEG ratio is not strictly a measure of value, as I see it. It is a ratio indicating earnings growth, thus the earnings velocity of the company. It would be more useful as an indicator for my growth model than for the value model. Unfortunately, it is not readily available to be scanned from the newspaper etc., like the PE ratio.

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