A Forward PEG Ratio Calculator is a stock valuation tool that helps investors assess whether a company's stock price is fair by comparing it to its expected future earnings growth. It refines the standard Price-to-Earnings (P/E) ratio by incorporating a forward-looking perspective. While the P/E ratio shows how much investors are willing to pay for current earnings, the Forward PEG ratio shows how much they are paying for future growth. This makes it particularly useful for evaluating high-growth companies where the current earnings may not fully represent the company's potential. Consequently, investors use this calculator to gain a more dynamic and complete picture of a stock's valuation.
formula of Forward Peg Ratio Calculator
The Forward PEG ratio is calculated by dividing a company's forward-looking P/E ratio by its estimated future earnings growth rate.
Forward PEG Ratio = Forward P/E Ratio / Expected Earnings Growth Rate
Here is a breakdown of the components:
Forward P/E Ratio = Current Share Price / Estimated Future Earnings per Share (EPS)
Expected Earnings Growth Rate = The projected annual growth rate of the company's earnings per share, expressed as a whole number (for example, a 15% growth rate is entered as 15).
How to Interpret the Forward PEG Ratio
This table provides a general framework for interpreting the results of the Forward PEG Ratio calculation. While not a definitive rule, it serves as a valuable starting point for analysis.
| Forward PEG Ratio | General Interpretation |
| Less than 1.0 | The stock may be undervalued relative to its growth prospects. |
| Equal to 1.0 | The stock is considered to be fairly valued. |
| Greater than 1.0 | The stock may be overvalued relative to its growth prospects. |
| Negative | The ratio is not meaningful (due to negative expected earnings). |
Example of Forward Peg Ratio Calculator
Let's calculate the Forward PEG Ratio for a hypothetical technology company to determine its valuation.
First, we gather the necessary financial data for the company.
- Current Share Price: $120
- Estimated Future Earnings per Share (EPS) for the next year: $5.00
- Expected Earnings Growth Rate for the next five years: 20%
Step 1: Calculate the Forward P/E Ratio.
Forward P/E Ratio = Current Share Price / Estimated Future EPS
Forward P/E Ratio = $120 / $5.00 = 24
Step 2: Calculate the Forward PEG Ratio.
Forward PEG Ratio = Forward P/E Ratio / Expected Earnings Growth Rate
Forward PEG Ratio = 24 / 20 = 1.2
Therefore, the Forward PEG Ratio for this company is 1.2. Based on the interpretation table, this suggests that the stock might be slightly overvalued relative to its expected earnings growth.
Most Common FAQs
The standard (or trailing) PEG ratio uses historical data; it is calculated using the company's past earnings growth rate. The Forward PEG ratio uses future projections; it is calculated using analysts' estimates for future earnings growth. The Forward PEG is often considered more relevant for investment decisions because stock prices are based on expectations of future performance.
A common rule of thumb, popularized by investor Peter Lynch, is that a PEG ratio of 1.0 represents a fair value. A ratio below 1.0 is often considered good, as it may indicate that the stock is undervalued. However, this is not a strict rule. A company with very high, sustainable growth might justify a PEG ratio slightly above 1.0.
The expected earnings growth rate is a forecast and can be found from several sources. Major financial news websites (like Yahoo Finance, Bloomberg, and Reuters), brokerage platforms, and stock analysis services typically provide consensus analyst estimates for earnings growth, often for the next five years.