PEG Ratio

1) An iPhone is more expensive than Oppo

2) But what if an i Phone helps you to impress your Client

3) A Maruti Alto may be less expensive than a Honda City but what if a Honda City gets you a business deal because your Client saw you as more capable than the person who came to him in an Alto

3) The PEG Ratio is somewhat similar

4) Some stocks may seem very expensive to buy but because the growth rate is high for such a stock, the investor can recoup his investment faster than what the P/E Ratio indicates

5) Let’s say the P/E Ratio is 10. In simple words it means it will take 10 years to recoup the Rs 10 invested if there’s no growth in earnings. That is quite a long period.

6)But the scenario changes if there’s growth in earnings year on year. Hold your horses and understand a little more

7) What if the earnings growth rate of this stock is to 100%

This means that if you paid Rs 10 for a Rs 1 earning then by end of year 1 the earning is already Rs 2 & the stock price itself would double to Rs 20 at the very least

9) Because any company that doubles profit will have its P/E re-rated from 10 to a higher value because the demand for such a stock would soar

10) If the Growth Rate was 50% then you would double your investment in a little less than 2 years

11) Therefore the Expensive Price you pay for the stock cannot be seen in isolation

12) It has to be seen in combination with the Earnings Growth Rate