When using the PEG ratio, you are attempting to find the value of the stock or equity. Not only that, but when using the PEG ratio, this is factoring the stocks earnings growth as well. Its close cousin, the PE ratio, is typically used to see if a stock is undervalued or overvalued. With the PEG ratio, if the number ends up being lower, this could be a sign that the company has growth issues.
Growth issues in a company can be detrimental to your portfolio because as an investor, you want returns on your investments. With that, you have to also be careful because even though a company may not grow for some time, that does not always make it a poor investment. So when looking at a PEG ratio, a larger number can mean that the stock is overvalued or that growth is in the future. Reverse side of the coin could mean the company is undervalued or that the growth is not there. Either way, be sure to complete detailed research and figure out if this is a good fit for your portfolio.
The PEG ratio is purely fundamental and does not take into account the chart or any movements within it. Just like anything, be sure to look at as much of the story as possible because you want to get the best picture possible. Using the Internet is a great way to see how other people use the PEG ratio in their analysis, which can spark ideas in your own trading and investing. Be sure to test this out and make sure it fits with your current processes. If you get stick or find that you need ideas, reach out to an investing professional and they can help to guide you in the right direction. The PEG ratio is a great tool to learn and keep you in your arsenal of evaluation tools and is also widely used in the investing community.
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Nathan Young is a Senior Member of Macroaxis Editorial Board - US Equity Analysis. With years of experience in the financial sector, Nathan brings a diverse base of knowledge. Specifically, he has in-depth understanding of application of technical and fundamental analysis across different equity instruments. Utilizing SEC filings and technical indicators, Nathan provides a reputable analysis of companies trading in the United States.
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