What is a PE/PEG Ratio?
The PE ratio (price-to-earnings ratio) of a stock is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is calculated by dividing a company's share price by its earnings per share.
Investors use PE ratio to ascertain whether they are getting value for money on the stock they are investing/selling in.
PEG is an acronym for ‘Price Earnings Growth', a ratio which helps measure the relationship between the current price of a stock, the earnings per share and the future growth. These are of course key figures when evaluating a possible purchase as in essence you are seeking to find a company in which the shares are underpriced in relation to their current and future earnings.
John Cotter, Vice President of Barclays Stockbrokers, talks about PE and PEG Ratios in Cotter's Corner and tells us why they are such a useful tool.