PEG - What is it and how do I calculate it?

In an effort to continue to assist investors with their homework, I will publish posts for education purposes.

Occasionally on the show "Mad Money" hosted by Jim Cramer, you will hear about the "PEG Ratio". The PEG stands for Price to Earnings to Growth Rate Ratio....

Let's walk through the below as an example:

Current Price per Share = $20.00

Current Earnings per share on a twelve month basis = $1.20

So, the PE ratio is equal to 16 or $20 divided by $1.20

Next, you want to find the expected next year earnings growth rate. You can find this in the Yahoo Finance website under the analyst estimates section....Here is a link to the analyst estimates page for Given Imaging Analysts Estimates.

For this example, let's assume that the earnings growth rate is expected to be 10%.

Therefore, the PEG ratio is equal to 1.6x or 16(P/E ratio) divided by 10 (earnings growth rate)....

So how to use it.....PEG is a widely used indicator of a stock's potential value. It is favored by many over the price/earnings ratio because it also accounts for growth. Similar to the P/E ratio, a lower PEG means that the stock is more undervalued. A rule of thumb for the show is for a stock to have a PEG lower than 2.

Feel free to email me questions or any other topics you would like me to write about....Enjoy and happy investing