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.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
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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.
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.
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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