# PEG Ratio

The PEG ratio is a powerful formula which compares earnings growth and the Price Earnings Ratio:

**Divide the current Price Earnings Ratio by the expected long-term growth rate (in earnings per share)***

- More than 1.0 is poor;
- Less than 1.0 is good;
- Less than 0.5 is excellent.

If dividends are significant, add the Dividend Yield to the growth rate (when calculating the PEG ratio).

### Example

Intel Corporation had grown earnings per share by an average of 40% p.a. over the period 1992 to 1995. Compare this to their Price/Earnings ratio in the first quarter of 1996, a PE of only 10 times earnings.

**10 divided by 40 = a PEG
Ratio of 0.25**

This is an exceptional reading! And by mid-2000 Intel's price had appreciated close to 1000%.

## How do we calculate the long-term growth rate?

We start with past performance and then study analysts forecasts:

- Examine sales and earnings per share growth over the past 3 to 5
years:

What growth rates have been achieved in recent years?

- Obtain earnings forecasts from a reliable analyst or use consensus
forecasts:

Are sales and earnings forecasts consistent with past performance?

Further details can be found at Value Investing.

## Price Earnings Ratio

To calculate the Price Earnings Ratio:

#### Divide current market price by the last 4 quarters earnings per share.

There is no need to calculate this yourself, look in the financial section of
your newspaper and you should the current find Price Earnings Ratio (*PE*
or *PER*) and Dividend Yield quoted along with market prices. The
information is also available from most online brokers.