Module 31.4, LOS 31.k: PEG ratio and its uses

The PEG ratio standardizes different the P/E ratio for stocks with different growth rates. This is effective because one of the main drivers of the P/E ratio is growth. Lower PEG ratios indicate relative undervaluation in companies with similar risk profiles.

Some issues of the PEG include that the P/E is not linearly related to g, that the PEG doesn’t account for risk, and that it only uses one g value, thus ignoring the potential for multistage growth in a firm.

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