Valuation ratios · Question 12 of 12
Share A has a P/E of 25 with expected earnings growth of 10% a year, share B a P/E of 15 with 15% growth. What does the PEG ratio show?
1 answer is correct. Hard
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Answer
- C B is more cheaply valued relative to growth (PEG 1.0 versus 2.5)
Explanation
PEG = P/E / growth rate: A comes to 25 / 10 = 2.5, B to 15 / 15 = 1.0. Relative to its expected growth, B is therefore cheaper. The conclusion, however, stands or falls with the quality of the growth estimate.