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Transcript
- 00:00
Finance Allah shmoop what is priced toe earnings to growth
- 00:06
or a peg ratio You know what the P E
- 00:10
ratio is right And if you don't I'll check out
- 00:12
our fine opus on said Subject Here it's him up
- 00:15
So price here's build a bore Stock trading at forty
Full Transcript
- 00:19
bucks a share It had net income or earnings last
- 00:22
year of two bucks a share in trades at yes
- 00:24
twenty times earnings So that's a P and in hee
- 00:28
price and in earnings there it trades at twenty times
- 00:31
earnings Um yeah So what does that mean Well if
- 00:36
it held the earnings flat and basically all of its
- 00:38
earnings was cash earnings Not like some fancy accounting trick
- 00:42
Well if earnings were flat for twenty years well the
- 00:45
company would have made back all of its valuation in
- 00:48
cash profits and everyone would yawn right Twenty years at
- 00:52
two bucks a year twenty times two is forty right
- 00:54
Well that company would have paid up five percent cash
- 00:57
return yield Right Two bucks in earnings over forty bucks
- 01:00
a share to over forty in California and in Texas
- 01:04
is five percent So is that a good return about
- 01:06
return Was there a lot of risk in that number
- 01:08
Growth shrinkage Wealth in a peg ratio Earnings growth is
- 01:13
taken into consideration when evaluating the ratios of a stock
- 01:17
So twenty times earnings is kind of a ho hum
- 01:19
multiple But this company has no growth so that twenty
- 01:22
times is probably a pretty high multiple as a multiple
- 01:25
You know all things considered like twenty years a long
- 01:28
time to get all your money back What if earnings
- 01:30
were doubling each year for the next five years Like
- 01:32
earnings went from two to four to eight to sixteen
- 01:35
to thirty two bucks a share Well then twenty times
- 01:37
earnings was ludicrously cheap Growth was one hundred percent versus
- 01:42
that zero percent where twenty times earnings Look you know
- 01:45
decent Well the basic idea and this one is coined
- 01:47
by Peter Lynch the famed portfolio manager who brought Fidelity
- 01:51
to fame Is that a peg ratio of one means
- 01:54
that a stock is basically fairly priced that is P
- 01:57
E ratios need contexts specifically the context of earnings growth
- 02:02
The formula takes the P E ratio say it's a
- 02:04
twenty and then puts it over the annual earnings per
- 02:08
share growth number and note that it's per share not
- 02:11
just overall company earnings Like if a company grew earnings
- 02:15
by acquiring for stock a lot of competitors well it's
- 02:18
share count would balloon While it's earnings grew fast as
- 02:21
well but likely the dilution and suffered would mitigate most
- 02:25
of the upside in earnings growth So on our twenty
- 02:27
times earnings number a company with no growth gives us
- 02:30
a peg ratio of twenty over zero which is an
- 02:34
undefined number But peg ratio is all about how expensive
- 02:38
the price to earnings ratio is relative to the growth
- 02:41
of the company Wow we did not see that plot 00:02:45.65 --> [endTime] twist coming yellow
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