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What is the PEG ratio and how is it interpreted?

The PEG ratio stands for Price Earnings Growth.

It is a measure of whether a stock represents growth at a reasonable price.

The formula is PEG = PE / EPS growth

PE = the Price Earnings Ratio

PE = Price / EPS times

EPS Growth = Earnings Per Share Growth%.

EPS growth is normally = (Latest EPS - Previous EPS) / Previous EPS x 100

Some people prefer to use the average EPS growth for the last three years to even out big fluctuations.

It could also be calcualted using estimated EPS, but that is only as good as the estimator's skill.

Example:

Latest price $8.00

Latest year's EPS = 50c

Previous year EPS = 40c

EPS growth = (50 - 40) / 40 X 100 = 25%

PE = 800 / 50 = 16 times

PEG = 16 / 25 = .64

To interpret the PEG ratio:

1.0 = fair value

>1.0 = expensive

<1.0 = cheap

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