Key takeaways

● PEG indicator (the ratio of price-earnings ratio to profit growth rate) is calculated by dividing the company's price-earnings ratio by its profit growth rate.

● PEG, as a stock evaluation indicator, is more comprehensive than PE because it also takes into account the future growth rate of earnings per share.

● When the PEG ratio value is 1, it usually indicates a good correlation between the market value of the company and its projected profit growth, indicating good growth potential in the future.

Understanding the PEG indicator

The PEG indicator refers to the company's price-earnings ratio (PE) divided by the "compound annual growth rate of earnings per share for the company's future 3 or 5 years multiplied by 100%."

While PE only reflects the current value of a stock, PEG connects the current value of the stock to its future growth.

The benefit of using the PEG indicator for stock selection is that it compares the price-earnings ratio with the company's growth potential, with the key being to make accurate predictions about the company's performance.

Investors are generally accustomed to using the pe ratio to assess the value of stocks. However, when encountering extreme situations, the operability of the pe ratio is limited. For example, there are many stocks in the market that have pe ratios much higher than the average level of the stock market, even pe ratios that are hundreds of times higher. In such cases, it is not possible to evaluate the value of these stocks using the pe ratio.

But if we compare the pe ratio with the company's performance growth, those stocks with extremely high pe ratios appear to be reasonable, and investors will not consider the risk too high. This is the pb indicators.

The pb indicators, although not as widely used as the pe ratio and the pb ratio, are equally important.

The limitations of the pb indicators

There are several things to consider when using the pb indicators as part of stock analysis.

Both the numerator and denominator of the pb value involve predictions of future profit growth, which can have a high margin of error. It is difficult for investors to fully predict when a company's growth will slow down or accelerate.

In addition, caution should be exercised when using the pb ratio to analyze value stocks or slower-growing companies. This is because the profit growth of these companies may be lower, resulting in a higher pb ratio.

For example, if a company has a pe ratio of 15 times and has been growing at a consistent rate of 5% per year for decades, then its pb ratio is 3.0, which may seem expensive. However, for investors seeking safety and stability, given its stable development rate, this company may still have reasonable investment value.