PEG Ratio

Someone who follows my blogs asked a question the other day. She was wondering if my Price/Graham Price Ratio was the same as the PEG ratio. It is very different.

The PEG Ratio is the Price/Earnings to Growth Ratio or P/E ratio/Annual EPS Growth. The lower the PEG Ratio is the better the stock price. A fairly priced stock should have a PEG at 1.

For example with Badger, I can calculate both a Trailing or Historical and a forward or future PEG Ratio. For Badger Daylighting Ltd (TSX-BAD, OTC-BADFF), I can calculate the PEG.

The Trailing or Historical PEG would be 2.03 (18.78/9.23) which is the current P/E of 18.78 divided by the 5 year growth in EPS at 9.23%. I can also use the 5 year running average growth over 5 years which is 10.33 and gets us the PEG Ratio of 1.82.

The Forward or Future PEG Ratio would be using the anticipated EPS growth for 2013 of 22.82% and this would give us a PEG of 0.82 (18.78/22.82). You could also use the average of next 3 years of growth and dividend 18.78 by averaging the growth rates of 22.82%, 17.23% and 4.32% for a PEG Ratio of 1.27.

The P/E Ratio I was using of 18.78 is based on a stock price of $55.60 and 2013 earnings estimate of $2.96. This is the forward P/E Ratio. You could also use the Trailing P/E of 23.07 which is based on a stock price of $55.60 and 2012 earnings of $2.41. For a Trailing P/E you could also use the one based on EPS over last 12 months to most recent report of June 2013, which is $2.61. The EPS here is 21.30 based on Stock Price of $55.60 and EPS of $2.61.

Check out information on this ratio at Investopedia. This is generally a good site to get information on all the ratios that are used for stocks. There is also an article on Wikipedia on this subject. I used Google to search these sites. The search engine, especially the Wikipedia one is not nearly as good as Google.

I will talk about the Graham Price or Number in another post.

On my other blog I am today writing about Great-West Lifeco Inc. (TSX-GWO, OTC-GWLIF)...continue...

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my site for an index to these blog entries and for stocks followed. Follow me on Twitter.