PEG Ratio : Complicated but important

Why anyone is buying stock? For Dividend and capital gains.

Why that will happen? If the Company is growing or available at cheap valuation and having potential for growth.

So many investors use PE Ratio as indicator of undervalued stocks. But how do you know that it is undervalued and not fairly valued? Many times market punish stocks and make it low PE stock. Now?

There are some companies which was growing in past but it is clear due to some reason that in near future the growth will come down. Commodity stocks or automobile stocks are examples. Now?

There are some stocks which have earnings but growth is volatile and uncertain. Agriculture and related stock in Some part of the world. Now?

There are some companies performing but management is unable to lead the company. They are making profit all because someone was there giving them demand. If there will be any Change in technology or Govt Rule or Other things,it will impossible for the company to grow. Now?

I am agree that there are no answers to all of the questions I was talking but some of the questions can be answered with the help of PEG Ratio.

Core concept of PEG ratio is to find the company which is available at discount and also showing growth. Here is the catch.

What is growth? Growth in revenue? Growth in profits? Or future growth in Profit? All three are important. How can company show growth in profit without growth in revenue? And what is revenue? For bank stocks there are many type of revenue. Total revenue which include other income like fee? Or net interest income is revenue? Or the amount received from Borrowers is revenue? It is complicated. Many analysts use different things.

What I am thinking is when someone is investing in equity is all because of future. But whatever it is, it can’t show big difference all the time. Say it’s imposible for companies that are growing with 8% will start growing from tomorrow at 16%. If happen it’s good but most of the time it’s because of One time Adjustment.

So accepting the average profit growth for last one or two years is acceptable.

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About Ashutosh Tilak

Tracking Indian Capital Market since 2010. Finance Student, On this blog I am writing about finance and Investing. You can contact me or @androidashu & @InsideFinanc on twitter