I understand that P/E is a discriptive stat and does not give a rate of growth. PEG seems to make more sense particularly with less mature stocks. How is PEG calculated when looking at the balance sheet and how do you use a PEG ratio in evaluating when stocks may be undervalued?
To calculate PEG, take PE and divide it by earnings growth. Most PEGs are you see are based on 5 years growth, unless otherwise stated. This to me is too far into the future. It's hard enough to guess earnings growth for this year and next, much less 5 years down the road.
So, I digress. If you want to calculate PEG for this year and next, take the current PE and go to MSN website for one…
http://moneycentral.msn.com/investor/invsub/analyst/earnest.asp?Symbol=hon
Look at the earnings estimates growth rates for 07 and 08 in the last 2 columns. For example, HON with a PE of 21 will have a PEG of
PEG this year = 21/22=0.95
PEG next year= 21/13.5=1.56
If PEG<1 ==> Great
If PEG between 1 and 2 ==> Caution
If PEG > 2 ==> Red Flag.
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