The market is usually more concerned about the future than the
present, it is always looking for some way to figure out what is going
to happen in the companies future.

A ratio that will help you look at future earnings growth is called the
PEG ratio.

You calculate the PEG by taking the P/E and dividing it by the
projected growth in earnings.

PEG = (P/E) / (projected growth in earnings)

For example, a stock with a P/E of 30 and projected earning growth next
year of 15% would have a PEG of 30 / 15 = 2.

Technically speaking: The lower the PEG number, the less you
pay for
each unit of future earnings growth. So even a stock with a high P/E,
but high projected earning growth may be a good value.

So, to put it very simply, we are interested in stocks with a
low PEG value.

Just for the sake of understanding, consider this situation, you have a
stock with a low P/E. Since the stock is has a low P/E, you start do
wonder why the stock has a low P/E. Is it that the stock market does
not like the stock? Or is it that the stock market has overlooked a
stock that is actually fundamentally very strong and of good value?

To figure this out, you look at the PEG ratio. Now, if the PEG ratio is
big (or close to the P/E ratio), you can understand that this is
probably because the “projected growth earnings”
are low.
This is the kind of stock that the stock market thinks is of not much
value.

On the other hand, if the PEG ratio is small (or very small as compared
to the P/E ratio, then you know that it is a valuable stock) you know
that the projected earnings must be high. You know that this is the
kind of fundamentally strong stock that the market has overlooked for
some reason.

Important note: You must understand that the PEG ratio relies on the
projected % earnings. These earnings are not always accurate and so the
PEG ratio is not always accurate.

Having understood these basic three ratios, you probably have started
to understand how these ratios help you understand a stock and what is
valuable and what is not.

In the next section we shall look at some of the things that every investor must know about. Something that SILENTLY eats into the profits of each and every investor and how to beat it...

Next - Inflation and how it silently eats your money! >>

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