I’m struggling to understand why PEG is a good metric. Say a company is expected to grow its income with a rate of x (x=1.05 if the company is growing 5%).
If the current PE is 1, the forward PE is going to be 1/x and the PEG will be 1/100*(x-1)
Hence PEG = FwdPE * 0.01 * x/(x-1)
Intuitively, I get what the forward PE is (how much will the PE be next year?), but the PEG seems arbitrarily “distorted” (go ahead and plot x/(x-1)).
For example take two companies that are expected to barely grow next year, company A has a PE of 100 and is expected to grow by 0.1%, company B has a PE of 1 and is expected to grow by 0.001%. Both companies have the same PEG (1000) even though B is clearly a better buy.
What is the rationale for using PEG rather than the forward PE or maybe another metric that could make more sense like number of years to get a 100% return on investment? (which I get has the problem of involving a bit more math, but we have Excel, right? :))
Leave a Reply