| Here are some of the criteria which are may help | | | | its current earnings. Some companies trade at higher |
| you making a decision whether or not you are | | | | P/E ratio when they are expected to grow |
| selecting the right stocks which have an excellent | | | | exceptionally in the coming months or years. |
| potential for going up in value. It may not be possible | | | | Sometimes stocks with high P/E ratio though bad, |
| to find many stocks which satisfy all of the following | | | | can be a good investment as they would pay a large |
| requirements. But if you can satisfy 3 out of the | | | | dividend when their earnings climb tremendously. |
| following 4 requisites, it may be acceptable. | | | | 3. P/E/G of the stock should be less than 1 |
| 1. Price of the stock divided by the book value should | | | | This compares the stock's P/E ratio to its expected |
| be less than 1. | | | | Earnings Per Share (EPS) growth rate. If we take |
| Book value is the difference between values of | | | | speculation out of the market, Price/Earnings To |
| assets and liabilities. Book value (BV) is the theoretical | | | | Growth ratio (PEG ratio) should be equal to 1. If PEG |
| value of any stock. If we take the speculation out of | | | | is less than 1, it means that the stock price is |
| the market, every stock should be trading at its | | | | undervalued or that the companies' future EPS |
| book value. Both price and BV ratio measure amount | | | | growth will be lower than the market estimates and |
| paid for the shareholders equity. Lower the ratio of | | | | if it more than 1, it means that the stock is |
| the price of the stock to the book value is, more | | | | overvalued. The stocks with value tend to have PEG |
| should be the desirability to pick up the stock to buy | | | | less than 1. |
| it. | | | | This ratio was developed to overcome the |
| Computing this ratio is simple and it is easy to | | | | shortcomings in the usage of P/E ratio. The ratio is |
| understand. This provides quick view at how the | | | | used to identify the undervalued or overvalued |
| market is valuing the assets and their earnings. This | | | | stocks using PEG ratios. The PEG ratio works best |
| ratio is not influenced by accounting rules and hence | | | | with growth companies. This ratio figure is a rule of |
| the price book value ratio works around the world. | | | | thumb not absolutes. This ratio does not take |
| However, the assets value is taken at their purchase | | | | inflation into account and it would be meaningless |
| price, not the current market value. Hence the ratio | | | | calculating PEG ratio if the rate of inflation is equal to |
| may not give a precise measure. Usage of this ratio | | | | that of growth rate. This ratio can be used as a |
| may not hold good for companies that rely on | | | | supplement with other methods to come to a better |
| intellectual property. | | | | conclusion. |
| 2. P/E of the stock should be less than 70. | | | | 4. Percentage of EPS Growth rate should be greater |
| P/E is the ratio of the current price of the stock to | | | | than 5%. |
| the earnings of the last year. The higher this ratio is, | | | | EPSG is the Earnings per share growth of the |
| more you are paying for the stock compared to its | | | | company. It is expressed as expected earnings |
| earnings. It is used to know how expensive or cheap | | | | growth of the stock from one year to the other. It |
| a stock is against its earnings. The ratio gives an idea | | | | is expressed as a percentage which is company's |
| of willingness of market to pay for the company's | | | | change in earnings from the last year to the estimate |
| earnings. Investors estimate if the stock is | | | | of the next year divided by earnings of the last year. |
| overvalued or undervalued. A lower P/E ratio of a | | | | The greater this percentage is more desirable the |
| stock indicates that the stock is cheaper relative to | | | | stock is. |