Investors use the PEG ratio to assess investment decisions. The formula is as follows:
PEG = (P/E) / (EGR)
Where EGR stands for Earnings Growth Rate.
The problem arises when the ratio fails to consider ROIC, potentially leading to inadequate evaluations.
The table displays a comparison of two organizations with different ROICs. In such case, real value is the same, while PEG ratios differ significantly
Source:
#VALUATION – Measuring and Managing the Value of Companies, 7th Edition
McKinsey & Company,
Tim Koller, Marc Goedhart, David Wessels
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