Price to earnings ratios are a common way to assess whether a share is cheap or expensive.

So for example if a firm has a P/E ratio of 10 and its earnings growth rate is 20%, the PEG is 10/20, or 0.5. A PEG below one suggests a share may be cheap as the P/E ratio is supposed to be a reflection of a firm’s future earnings growth rate (so in theory a P/E of 10 suggests a firm should grow at 10% per annum). Equally a share with a PEG above one may be said to be expensive. However care is needed as if the expected growth rate is wrong then any conclusion drawn from the PEG is also invalid.

READ MORE