More on PE and PEG

This post contains general notes on PE and PEG metrics

Stock should have a "good" PE ration

I use the word good, because this depends on the sector that the stock is in. There is no generic number, but generally the lower the PE the better.

Calculation can be done one of two ways, (however this is normally available on any financial site)

• P/E = share price divided by earnings per share
• P/E = market capitalization divided by net income

Be aware there are a number of different types of P/E numbers:

• Current P/E - uses the past 12 months
• Forward P/E - uses predicted earnings per share

If a company sells a division for substantially more than its book worth, this will affect the P/E.

Many people prefer to use free cash flow rather then P/E for valuation.

Note: P/B (Price to Book) should only be used for those companies with negative earnings. I don't like companies with negative earnings so I didn't learn much about it.

Note: P/S (Price to Sale) should only be used for those companies which are unprofitable. I don't like these companies so I didn't learn much about it.

From The Motley Fool - P/E definition
From Yahoo Finance - P/E By Sector

Rule: PEG Less then 1.0

A PEG of less then one generally is a good sign that a company is undervalued.

Calculation: P/E divided by rate earnings will grow (a guess)

A PEG of 1 = A fairly valued company
A PEG below 1 = An undervalued company
A PEG above 1 = An overvalued company

PEG is not helpful when the earnings estimate is 0 or negative

From The Motley Fool - Usefulness of PEG