The PEG ratio (Price to Earnings divided by Growth ratio) is a valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share (EPS), and the company's expected growth. In general, the P/E ratio is higher for a company with a higher growth rate. Thus using just the P/E ratio would make high-growth companies overvalued relative to others. It is assumed that by dividing the P/E ratio by the earnings growth rate, the resulting ratio is better for comparing companies with different growth rates.
The PEG ratio is used for individual stocks as a valuation measure that factors in growth rates. It is calculated by dividing the company's P/E ratio by its growth rate. Many investors would rather own a company with a high P/E ratio and an even higher growth rate than a company with a low P/E ratio and an even lower growth rate. A PEG ratio of one or less is typically viewed positively.
The PEG ratio is considered to be a convenient approximation. It was popularized by Peter Lynch, who wrote in "One Up on Wall Street" that "The P/E ratio of any company that's fairly priced will equal its growth rate", i.e. a fairly valued company will have its PEG equal to 1.
If we decide to apply the PEG ratio to various countries by dividing estimated GDP growth into the P/E ratio of the country's main stock market index. Many developed countries have low P/E ratios, but they also have low GDP growth, while developing countries may have higher market valuations as well as stronger GDP growth. Investors may find PEG ratios more useful than simple P/E ratios when determining asset allocations for various countries.
Below are the PEG ratios for 22 countries around the world. For each country, we will use the trailing 12-month P/E ratio for the index shown as well as estimated 2010 GDP growth. As shown, Russia and China have the lowest country PEG ratios at 1.86 and 1.90, respectively. Russia has a very low P/E at 8 and decent estimated GDP growth at 4.3%. China, on the other hand, has a rather high P/E ratio at 19.24, but its GDP growth is also very high at 10.10%. The US is right in the middle of the pack with a PEG of 5.07. Mexico rank just above the US with a PEG of 3.85, while Canada ranks just below the US at 5.67.
The PEG ratio is used for individual stocks as a valuation measure that factors in growth rates. It is calculated by dividing the company's P/E ratio by its growth rate. Many investors would rather own a company with a high P/E ratio and an even higher growth rate than a company with a low P/E ratio and an even lower growth rate. A PEG ratio of one or less is typically viewed positively.
The PEG ratio is considered to be a convenient approximation. It was popularized by Peter Lynch, who wrote in "One Up on Wall Street" that "The P/E ratio of any company that's fairly priced will equal its growth rate", i.e. a fairly valued company will have its PEG equal to 1.
If we decide to apply the PEG ratio to various countries by dividing estimated GDP growth into the P/E ratio of the country's main stock market index. Many developed countries have low P/E ratios, but they also have low GDP growth, while developing countries may have higher market valuations as well as stronger GDP growth. Investors may find PEG ratios more useful than simple P/E ratios when determining asset allocations for various countries.
Below are the PEG ratios for 22 countries around the world. For each country, we will use the trailing 12-month P/E ratio for the index shown as well as estimated 2010 GDP growth. As shown, Russia and China have the lowest country PEG ratios at 1.86 and 1.90, respectively. Russia has a very low P/E at 8 and decent estimated GDP growth at 4.3%. China, on the other hand, has a rather high P/E ratio at 19.24, but its GDP growth is also very high at 10.10%. The US is right in the middle of the pack with a PEG of 5.07. Mexico rank just above the US with a PEG of 3.85, while Canada ranks just below the US at 5.67.
The US does have the best PEG ratio in the G-7, so US investors looking for developed country exposure might be better offer staying right at home. European countries have exceptionally high PEG ratios because of their mediocre valuations and low growth rates. Australia and Spain both have negative PEGs -- Australia because it has a negative P/E and Spain because it has negative GDP growth.
