Problems with PEG

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