Growth investing

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8. The PEG factor

The prospective PEG of a company is calculated by dividing its prospective P/E by the estimated growth rate of the company. If you have the figures to hand, the calculation is very simple:

Example

The aim, according to Jim Slater, is to find shares which have a PEG of not more than 0.75 and preferably less than 0.66.

Put even more simply, the lower the PEG, the less you are being asked to pay for estimated future earnings.

Why is the PEG an improvement on P/E? Its followers argue that whereas P/E just relates earnings to share price, the PEG factors in estimated growth rate as well, which makes it a more significant ratio for growth investors.

Note that to calculate a PEG you need to know the P/E ratio, the prospective P/E ratio, and the estimated future growth rate. You can research these things yourself by looking at a company's report and accounts.

1. What is a growth stock? 2. Comparison with value investing 3. Traditional characteristics of a growth stock 4. Anatomy of a growth stock - Peter Lynch 5. Ten dos and don'ts from Peter Lynch 6. Jim Slater - The Zulu Principle 7. Earnings growth 8. The PEG factor 9. Competitive advantage 10. Do growth stocks have to be small? 11. A short diversion into internet stocks 12. When to sell a growth stock 13. Other factors 14. Case study of a growth stock - Sage 15. Conclusion

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