DAY 9 - TASK 2

Industry PE and PEG Ratio

Industry PE
PE is Price to earning ratio. Industry PE is the average price-to-earning ratio of a
particular sector or industry. It’s used as a benchmark to compare the PE of a stock to
the PE of an entire industry.

If the PE of a stock is lower than its industry PE, then it’s considered to be
undervalued in comparison to its other peers.
Important Points:
1. If a stock has lower PE as compared to the industry PE, it does not necessarily
mean it’s a good company to buy. Many new investors make the mistake of
searching for low PE companies. Most of these companies do not perform well in
the long run.
2. A low PE company could have fundamental issues. In the banking sector, banks
with low PE are usually struggling with NPA (non-performing asset) issues. Low PE
could also be due to management and various other issues.
3. Industry leaders and fast growing companies usually command a higher PE than
the industry PE.

PEG
The PEG ratio (price-earnings to growth) is a valuation metric that describes the
relationship between the price of a stock, the earnings generated per share and the
growth rate. It is obtained by dividing the price per earnings of a company with its
growth rate. Generally, a company with a high growth rate will have a higher price to
earnings ratio. Using only the price to earnings ratio to compare two different
companies will make the company with a higher growth rate to appear overvalued.

PEG = PE ratio/Annual Earnings per share growth rate

The PEG ratio is used to determine a stock’s value while also factoring in the
company’s growth rate. Low price-earnings to growth ratio means that a stock is
undervalued and may be worth investing in. High price-earnings to growth ratio means
otherwise.
A major disadvantage of price-earnings to growth ratio is that price-earnings to growth
ratio is less appropriate for measuring companies without high growth. Large, well-
established companies, for instance, may offer dependable dividend income, but little
opportunity for growth.

PEG Ratio