Evaluation of Businesses Using Market Multiplies

Evaluation of Businesses Using Market MultipliesThere are many methods that are used to evaluate each company and compare them with one another. One of the most used multiples of all is the definitely the Price Earnings to Growth Ratio. In this short and simple guide, this article will explain how to quickly calculate the market multiple of Price Earnings to Growth Ratio. This guide will also show a practical example, that all of you can follow without any difficulty.

Before you start to calculate it, you need to know what the Price Earnings to Growth Ratio is. Also known by the diminutive “PEG”, this is a multiple widely used in the work of financial analysis and fundamental analysis. This type of multiple serves to make you understand the circumstances in which an action can found overbought or oversold. In a nutshell, it will help you discover in which situations a particular company is overvalued or undervalued. This indicator comes from the ratio of the market multiple Price / Earnings and the expected rate of growth relative to conclusive profits.

You have to calculate this multiple by putting in the numerator the Price / Earnings of any given company. It is the ratio of the market price of a share and earnings per share. In the denominator, you have to put the expected rate of earnings growth. We can get more information on the position on the market thanks to a quick initial analysis of the indicator. A PEG equal to 1 tells a correct evaluation of the company by the market. If the PEG is greater than 1, one can speak of a substantial overvaluation of the company. If the PEG will be less than 1, the company can be defined as underestimated.

Now, proceed to calculating the PEG of any enterprise. Let’s take an example.

The Earnings per share of a particular company is equal to 200%, while the share price on the market is 18% and the expected rate of earnings growth is 8.1%. The first step you need to take is to calculate the numerator (Price / Earnings). This is equal to 0.09%. Consequently, the denominator will be 8.1%. The PEG final will be 1.1%. In this case, the firm is overvalued by the stock market.

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