Understand PEG ratio — Hinglish notes

2.5.10 · Stock-Market › Financial Ratios

What It Is

YE METRIC KYUN EXIST KARTA HAI: Investors ne realize kiya ki ek 40%-growth company ka P/E 40 aur ek 5%-growth company ka P/E 15 ko compare karna apples-to-oranges hai. Peter Lynch ne is distortion ko adjust karne ke liye PEG ko popularize kiya.

Derivation from First Principles

Shuru karo is question se: Ek given growth rate ke liye "fair" P/E kya hoga?

Step 1: Assume karo ki earnings rate $g$ (percentage mein) se annually grow karti hain. $n$ saal baad: $EPS_{n} = EPS_{0} \times (1 + g /100)^{n}$

Step 2: Ek rational investor aaj zyada pay karta hai agar future earnings zyada hon. Ek simplified duniya mein jahan P/E ko growth ke saath linearly scale karna chahiye (first-order approximation), hum set karte hain: $Fair P/E \propto g$

Step 3: Ek benchmark define karo: Agar growth = 1% ho, toh hum kitna P/E tolerate karein? Maan lo ki har 1% growth par P/E of 1 "fair" hai (yeh Lynch ka heuristic hai). Tab: $Fair P/E = g \times 1 = g$

Step 4: Actual P/E woh hai jo market hamein deta hai. Actual ko fair se compare karo: $PEG = \frac{Actual P/E}{Fair P/E} = \frac{P/E}{g}$

YE STEP KYUN? Hum ratio of ratios bana rahe hain—aap kitna pay kar rahe ho (P/E) per unit us cheez ke jo aap paa rahe ho (growth). PEG = 1 ka matlab hai ki market ki valuation simple linear model se match karti hai.

Worked Examples

Example 1: Tech Growth Stock

Given:

Stock A: Price = $150, E P S =$ 3, Expected growth = 30% per year

Step 1: P/E calculate karo $P/E = \frac{150}{3} = 50$

Yeh step kyun? Growth ke liye adjust karne se pehle hume "price" component chahiye.

Step 2: PEG calculate karo $PEG = \frac{50}{30} = 1.67$

Interpretation: PEG > 1 suggest karta hai ki market ne high growth expectations ko price kar diya hai. Aap har 1% growth ke liye $1.67 ka P/E pay kar rahe ho—potentially overvalued hai unless growth 30% se aage accelerate kare.

Example 2: Mature Dividend Stock

Given:

Stock B: Price = $40, E P S =$ 4, Expected growth = 5% per year

Step 1: P/E $P/E = \frac{40}{4} = 10$

Step 2: PEG $PEG = \frac{10}{5} = 2.0$

Itna high PEG kyun? Bhalae P/E low hai, growth anemic hai. Aap har 1% growth ke liye $2 ka P/E pay kar rahe ho—growth-adjusted basis par yeh Stock A se zyada expensive hai!

Example 3: Value Turnaround

Given:

Stock C: Price = $25, E P S =$ 2.50, Expected growth = 25%

Step 1: P/E $P/E = \frac{25}{2.50} = 10$

Step 2: PEG $PEG = \frac{10}{25} = 0.4$

Interpretation: PEG 1 se kaafi neeche hai—potentially undervalued. Market shayad 25% growth forecast par skeptical ho, ya yeh ek hidden gem ho sakta hai.

Example 4: Do Stocks ki Comparison

Stock	Price	EPS	Growth	P/E	PEG
Tech Co	$200	$4	40%	50	1.25
Pharma Co	$80	$5	20%	16	0.80

Yeh kyun matter karta hai? Bhalae Tech Co ka P/E kaafi zyada hai (50 vs 16), Pharma Co growth ke liye adjust karne par relatively zyada expensive hai (PEG 0.80 < 1.25 ka matlab hai ki Pharma, growth per unit mein sasta hai).

Common Mistakes

When PEG Breaks Down

Zero ya negative growth: PEG = ∞ ya undefined ho jaata hai.
Lumpy earnings: One-time charges EPS ko distort karte hain; normalized earnings use karo.
Non-linear growth: PEG 1:1 P/E-to-growth assume karta hai. Reality mein, 100% growth P/E of 100 justify nahi karta (unsustainable).
Different industries: Software (high margin, scalable) retail se zyada PEG justify karta hai (low margin).

Recall Ek 12-Saal ke Bacche ko Samjhao

Socho tum trading cards collect karte ho. Card A ki cost $50 haia u r u s k i v a l u e ha r s aa l$ 10 badhti hai (20% growth). Card B ki cost $20 hai p a r s i r f$ 1 per saal badhta hai (5% growth). Kaun sa better deal hai?

Sirf price dekhoge toh Card B sasta lagega. Par Card A kaafi zyada tezi se grow kar raha hai. PEG ratio bilkul aisa hai jaise price ko growth speed se divide karo. Card A ke liye: 50 ÷ 20 = 2.5. Card B ke liye: 20 ÷ 5 = 4. Card A ka PEG kam hai, toh bhalae zyada cost kare, tumhe apne paise ke liye zyada growth milti hai!

Stocks mein, "price" P/E ratio hota hai, aur "kitni tezi se grow karta hai" woh earnings growth rate hai. PEG tumhe ek super-expensive-but-fast-growing tech company ko ek cheap-but-slow utility company se fairly compare karne mein help karta hai.

Active Recall Checkpoints

PEG < 1 ek stock ki valuation ke baare mein kya suggest karta hai?
Negative earnings wali company ke liye PEG use kyun nahi kar sakte?
Agar kisi stock ka P/E = 30 aur growth = 15% ho, toh PEG kya hai? Kya yeh attractive hai?
Forward aur trailing PEG mein kya difference hai?

Connections

Price-to-Earnings Ratio (P/E) — PEG ka numerator; pehle P/E samjho
Earnings Per Share (EPS) — P/E calculation ki foundation
Growth Investing — PEG growth investors ke liye central metric hai
Value vs Growth Stocks — PEG dono philosophies ke beech bridge karne mein help karta hai
Discounted Cash Flow (DCF) — Zyada rigorous model; PEG ek heuristic shortcut hai
Peter Lynch's Investment Strategy — Lynch ne "One Up on Wall Street" mein PEG ko popularize kiya
Relative Valuation Methods — PEG relative valuation toolkit mein ek tool hai

#flashcards/stock-market

PEG ka full form kya hai? :: Price-to-Earnings-to-Growth ratio

PEG ratio ka formula kya hai?

PEG = (P/E Ratio) / (Earnings Growth Rate in%)

PEG ratio < 1 kya suggest karta hai?

Stock apni growth rate ke relative undervalued ho sakta hai; aap har 1% growth ke liye $1 se kam P/E pay kar rahe ho

PEG ratio > 1 kya indicate karta hai?

Stock overvalued ho sakta hai; market ne high growth expectations ko price kar diya hai, ya growth valuation justify nahi karti

Stocks compare karne ke liye PEG, P/E se better kyun hai?

P/E growth rate account nahi karta—PEG, P/E ko growth se normalize karta hai, jisse fast-growing aur slow-growing companies ke beech fair comparison ho sake

Agar kisi stock ka P/E 40 aur expected growth 20% ho, toh PEG kya hai?

PEG = 40 / 20 = 2.0

Forward aur trailing PEG mein kya difference hai?

Forward PEG agle saal ke estimated P/E aur growth use karta hai; trailing PEG pichhle saal ka actual data use karta hai

Negative earnings wali companies ke liye PEG unreliable kyun hai?

Negative earnings P/E ko undefined ya negative bana deti hain, jisse PEG meaningless ho jaata hai

PEG as a valuation tool kab break down karta hai?

(1) Zero/negative growth, (2) Lumpy/one-time earnings, (3) Unsustainable growth rates (>50%), (4) Different margin profiles wali industries ki cross-industry comparisons

Ek stock ka Price =

60, E P S =

3, growth = 25% hai. PEG calculate karo.

P/E = 60/3 = 20; PEG = 20/25 = 0.8 (potentially undervalued)

PEG ratio ko kisne popularize kiya?

Peter Lynch, legendary Fidelity manager ne, apni book "One Up on Wall Street" mein

Kya PEG ke liye EPS growth ki jagah revenue growth use kar sakte hain?

Nahi—PEG specifically earnings (EPS) growth require karta hai, revenue growth nahi, kyunki revenue grow ho sakta hai jabki profits shrink ho jaayein