8. PEG Ratio - The NASDAQ Dozen
One of the more popular ratios stock analysts look at is the P/E, or price to earnings, ratio. The drawback to a P/E ratio is that it does not account for growth. A low P/E may seem like a positive sign for the stock, but if the company is not growing, its stock's value is also not likely to rise. The PEG ratio solves this problem by including a growth factor into its calculation. PEG is calculated by dividing the stock's P/E ratio by its expected 12 month growth rate.
For more information on utilizing the PEG ratio, visit Learning Markets.How to Score the PEG Ratio
- PassGive the PEG Ratio a passing score if its value is less than 1.0.
- FailGive the PEG Ratio a failing score if its value is greater than 1.0.
Looking at the PEG ratio for WMT in Figure 13, WMT should receive a failing score. You can see that the PEG Ratio is above 1.0.
PEG Ratio: FAIL
Figure 13PEG Ratio
All content in this article is supplied by Wade Hansen of Learning Markets. To learn more about their investor education offerings, please visit learningmarkets.com. Find more great articles from Learning Markets in our news sections.