Buying Good Growing Company's at Fair Price Using PEG Ratio

Price/Earnings/Growth Ratio (PEG Ratio) is one of the ratios which help in identifying good growing company's at fair prices. PEG ratio below 1 indicates that the stock is comparatively undervalued where as anything above 1 indicates that the company is overvalued. PEG Ratio of and around 1 indicates that the company is fairly valued.

In this example we will be analyzing the income statement of MindTree Software

1) Obtain EPS of the company:

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2) Find the Average Growth rate of the Company: Since the EPS of MindTree has grown from 8.68 to  64 in 10 years. This constitutes an CAGR on 22.114%

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3) Find the Price to Earnings Ratio of the Company: Find the P/E ratio of the company by dividing current market price by EPS.

1440/ 65.02 = 22.1

4) Find PEG Ratio: Find PEG Ratio by dividing P/E Ratio by Growth Percentage To Obtain PEG Ratio

The P/E Ratio in this example is 22.11% and the company's profit grows at the rate of 22.14%

Therefore when one divides 22.11 which is the P/E ratio by 22.14% which is the Avg. Growth of the company we obtain the Ratio of 1.

22.11/22.14 = 0.998

Conclusion: Since the PEG Ratio of the Stock is '1' the stock is fairly valued at Current Market Price and  also provides proper justification for the 22.1 times the earnings of the share.

Therefore this ratio helps in identifying good growing company's at fair or cheap prices which can provide good value.