What Is the Three-year Price to Earnings to Growth (PEG) Ratio?
The Three-year price to earnings to growth ratio (PEG ratio 3yr) is calculated as a company's current price-to-earnings (PE) ratio divided by its earnings growth over the past three years. In other words the same trailing 12 months (TTM) period three years ago.
The ratio is used to value a company while at the same time adding earnings growth to the valuation.
It thus gives you a more complete valuation picture than the standard PE ratio and lets you find undervalued or an attractive growth at a reasonable (GARP) investment.
Why do we use historical EPS growth
Why don’t we use expected or forecasted earnings growth you may be asking.
All the research we have seen have shown humans (incl. analysts) cannot forecast even if their lived depended on it.
That is why we used historical growth numbers.
What does the PEG ratio tell you?
It gives you a value and growth insight into the value of a stock.
A low PE ratio might let a company look cheap but adding its EPS growth gives you an additional insight.
For example, a low PEG ratio will make even high PE companies look attractive if they have high earnings growth.
The well-known investor Peter Lynch suggests that a fair value for a company is when its PE ratio is about equal to its EPS growth rate. This should give you a PEG ratio of 1.0. For example, a PE ratio of 10 and three year EPS growth of 10%.
Thus, a PEG ratio greater than 1.0 may indicate a company is expensive, while a PEG ratio below 1.0 means a company is undervalued or an attractive growth at a reasonable (GARP) investment.
Important note
The above over / undervaluation PEG value of 1 applies to the one-year PEG ratio. We have not seen any research on longer term PEG ratios so am not sure where the cut off value of PEG ratio is there. If you have seen any research about this, please let us know.
How is the PEG Ratio 3yr calculated?
The PEG Ratio 3yr is calculated as the Current PE ratio divided by Earnings per Share growth over the past 3 years.
Or as ((Current Price/ Current 12 months EPS) / 3-year EPS Growth) /100
How to use the ratio
Available as a screening ratio: Yes
Available as an output column ratio: Yes (Look for it under the Valuation heading)
How to select the lowest PEG ratio companies
To find companies with the lowest PEG ratio set the slider from 0% to 30%.
Special PEG sorting
When you build a screen using the sliders, on order to avoid loss making companies, we have applied a custom sort to the PEG Ratio.
This is how it works:
A → PEG -0.5
B → PEG 0.5
C → PEG 1
D → PEG 1.5
The custom sort would sort them as B, C, D, A
Remember
The PEG Ratio is calculated on a trailing 12 months (TTM) basis.
This means the last twelve months (not the company’s financial year) is compared to the same period in the past.
We do this to make sure that the screener data includes the latest, most up to date financial results.
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