Prospective Earnings Growth

Prospective Earnings Growth (PEG Ratio)

The idea is to scale the P/E ratio by earnings growth. Higher P/E multiples could be a result of higher growth opportunities. Expected earnings growth is usually derived from proprietary sources such as Institutional Brokers' Estimate System (IBES), First Call, or Zach's. The usual implementation is to divide the current P/E ratio by the five-year prospective earnings growth. This ratio is problematic if expected earnings growth is negative. As with the usual P/E ratio, zero or very small earnings causes problems too. For stock selection, I usually recommend looking at E/P (earnings price ratio) and expected earnings growth as two separate factors rather than a single PEG ratio. I also recommend looking at different horizons for expected earnings growth -- not just five years.

Price/Earnings-to-Growth Ratio

A ratio of a stock's valuation, that is, how expensive a stock is relative to its earnings and expected growth. It is calculated as:

PEG = Price/Earnings/Annual Earnings Growth per Share

A lower ratio indicates a less expensive stock with higher earnings and growth, while a higher ratio indicates the opposite. According to Peter Lynch, who popularized the ratio, a fairly priced stock has a ratio of 1.
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Tsugihara said she is ''very excited,'' referring to the fact that prospective earnings growth stemming from Kitajima's growing popularity has yet to be priced into the company's earnings forecast for the current business year.
However, Standard & Poor's believes ACE's prospective earnings growth and stability might be pressured as a result of the group's exposure to certain high-severity losses, developing operating performance from its Lloyd's and international operations, and the ongoing run-off of its discontinued operations.
The fund managers believe prospective earnings growth this year could reach 15 per cent, double the overall stock market rate, and with dividend growth of ten per cent, it could outstrip the eight per cent predicted for the market as a whole.
Fundamental analysts search for situations where a stock is undervalued or if a stock's prospective earnings growth is underestimated by a majority of investors.
Bassermann, Chief Executive Officer of ITDS, said, "The Board's decision to authorize the repurchase represents its belief that ITDS' stock price does not reflect the current and prospective earnings growth of the Company.
Analyst Mr Peter Joseph said: "The share price has already partially recovered after fears over the fit-out division, but considering the prospective earnings growth and strength of the balance sheet, we believe it has substantially further to go.

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