Hello inspired investors,
Remember ! ,
From the last presentation , as we discussed PEG ratio, you should have in mind that high P/E does not neccesarily mean that the stock is overvalued . Just because the stock price is high relative to the earnings does not ultimately mean that the price will go down. For example , the present P/E ratio of AMZN share is around 600 ,which may sound overvaluation but if the price of a share is sustainable relative to the earnings that the company has , this implies stability .But if you take another ratio into consideration , which is PEG , you will find more information behind the numbers. As defined by investors , PEG=( P/E ration )/ Annual EPS . So , what can we infer about this ratio ? Well, if we take the example with Amazon , it is obvious that this company is the leading one in the business , however we cannot compare it with Ebay . ( the market cap of Amazon is 3 times larger that ebay , they have different sales,etc. So , how are we going to compare it ? This is simple , as we defined PEG, it does not just depict the price to earning but also the growth of the company (EPS) , in other words, the resulting ratio is better for comparing companies with different growth rates.
Also , a good point to make here would be that in the long term , The P/E ratio of any company that's fairly priced will equal its growth rate", i.e., a fairly valued company will have its PEG equal to 1. So ,what is the intuition here ? If the company’s PEG is below 1, e.g. it is 0,6 , this means in the long run it will equate to 1 and vice verse , if it above one , just like Amazon has PEG=14,24 it may go down .
So, someone might ask : “if the PEG of a company’s share is 14,24 , isn’t it logical it will go down “ . The answer would be related to the trust that investors have in the company . If the mainstream is that the company’s price is 372 dollars (Amazon’s share price) , then it is going to be that much . If they keep on making innovations , it may even rise more than that. As long as the price is sustainable , investors do not really bother to think that the price is overvalued . It is all about what value you give behind a particular share .That is where the articles will be of crucial importance , that is why on the last presentation you were given articles . These articles ,news, earnings ,balance sheets, cash flow, income statement ,etc. , represent the intrinsic value of the stock .
I will put some links here if you are further interested and if you have any further questions you are always welcomed to ask :
1)This is a video that explains the basics of PEG ratiohttp://www.investopedia.com/video/play/peg-ratio/
2)This is just Wikipedia , but make sure that you understand the advantages and disadvantages of PEGhttp://en.wikipedia.org/wiki/PEG_ratio
3) This basically is PEG ratio explained with a little more details
http://www.youtube.com/watch?v=jfuBbRmksGo
Thank you for the attention !
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