Glossarytaught in M3.06
PEG ratio
Also called PEG, price earnings to growth.
Price to earnings divided by the expected earnings growth rate in percentage points. A company on 28 times growing at 22% has a PEG of 1.27.
The rule of thumb that one is fair value has no theoretical basis. It ignores the cost of capital entirely, ignores how long the growth lasts, and ignores what return the growth is earned at, which is the variable that decides whether growth is worth anything.
Picture two companies, both growing 20% on the same multiple. If one reinvests at 30% and the other at 10%, they can be worth very different amounts.
Use it as a screening shorthand, and do the valuation separately.
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