{"id":10163,"date":"2022-09-15T12:21:10","date_gmt":"2022-09-15T06:51:10","guid":{"rendered":"https:\/\/www.tickertape.in\/blog\/?p=10163"},"modified":"2022-09-15T12:27:05","modified_gmt":"2022-09-15T06:57:05","slug":"is-peg-ratio-used-correctly-in-markets","status":"publish","type":"post","link":"https:\/\/www.tickertape.in\/blog\/is-peg-ratio-used-correctly-in-markets\/","title":{"rendered":"Is PEG Ratio Used Correctly in Markets?"},"content":{"rendered":"\n

There has been a ton of bullishness about the Price\/Earnings-to-Growth (PEG) ratio being a great indicator to buy stocks. Motilal Oswal\u2019s wealth creation studies did a great job explaining that buying stocks below a PEG of 1 and especially 0.5 lead to good wealth generation.<\/p>\n\n\n\n

Hence it has become a habit for investors to compute PEG to compare the valuations of two companies. <\/p>\n\n\n\n

For example, let\u2019s say the P\/E (Price-to-Earnings)<\/a> of ABC Ltd is 30 and its growing Earnings Per Share (EPS)<\/a> by 25% and the P\/E of XYZ Ltd is 20 and is growing its EPS by 10%. On the face of it, company XYZ looks cheap but adjusting for growth, i.e., the P\/E ratio divided by growth PEG is 1.2 for ABC and 2 for XYZ, which means A is cheaper relative to B.<\/p>\n\n\n\n

Contrary to what people believe, the PEG ratio of two businesses are comparable if they are from the same business segment, same industry and comparable capital structure (D\/E), but in the real sense, the PEG of two business are comparable if the following is comparable: Length of sustainable growth, predictability of growth, return on equity<\/a> above discount rate, Competitive advantage (for how long can ROE be maintained above discount rate) and quality of earnings irrespective of what business segment and industry they belong to. <\/p>\n\n\n\n

Festive sweets are on us with a special 10% off on Tickertape Pro<\/a>! #HappyNavratri<\/pre>\n\n\n\n
Let\u2019s take a look at Divi’s Laboratories<\/a> vs Alembic Pharma<\/a>. Suppose we are standing at the beginning of FY 2017, and these are the numbers from the past few years:<\/p>\n\n\n\n
\"\"\/<\/figure>\n\n\n\n
So, Alembic Pharma grew at a much higher rate than Divi’s Laboratories and still was available at a much lower PEG ratio than Divi’s Laboratories making a compelling undervaluation case for Alembic. Can you guess the returns of Alembic Pharma and Divis from FY 2017- FY 2022?<\/p>\n\n\n\n
Alembic Pharma has broadly remained at the same level with an all-time high of ~1100, whereas DIVI’s has become a 3.5 bagger from April 2016 with an all-time high of 5300.<\/p>\n\n\n\n
On the valuation and historical growth front, it seemed that Alembic Pharma by far would outperform  Divi’s Laboratories, but the real scenarios turned out completely inverse. (PS: the main reason is Alembic\u2019s growth\/margins are not linear as there are one-time gains\/losses due to stiff industry competitiveness at the generic level. Whereas Divi\u2019s growth & margin<\/a> profile is more linear giving market confidence about future growth. However, this is not a comment on the quality of businesses; we are trying to explain how the market reacts in terms of valuations)<\/p>\n\n\n\n
This is the point we wanted to highlight, blind comparison of any valuation ratio, even if it\u2019s a sophisticated one like PEG, does not make sense. There are fundamental drivers of every valuation ratio. In an article shortly, we will also teach you how to calculate a company\u2019s intrinsic PEG ratio, i.e., the PEG ratio a company should deserve depending on its fundamentals.<\/p>\n","protected":false},"excerpt":{"rendered":"
There has been a ton of bullishness about the Price\/Earnings-to-Growth (PEG) ratio being a great indicator to buy stocks. Motilal Oswal\u2019s wealth creation studies did a great job explaining that buying stocks below a PEG of 1 and especially 0.5 lead to good wealth generation.<\/p>\n","protected":false},"author":100,"featured_media":10227,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"_lmt_disableupdate":"no","_lmt_disable":"no","footnotes":""},"categories":[1723],"tags":[],"acf":[],"modified_by":null,"jetpack_featured_media_url":"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2022\/09\/14-Sep-22-Is-PEG-Ratio-used-correctly-in-markets-2.png?wsr","_links":{"self":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/10163"}],"collection":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/users\/100"}],"replies":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/comments?post=10163"}],"version-history":[{"count":6,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/10163\/revisions"}],"predecessor-version":[{"id":10229,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/10163\/revisions\/10229"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media\/10227"}],"wp:attachment":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media?parent=10163"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/categories?post=10163"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/tags?post=10163"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}