What the PEG Ratio Tells Us Using the examples above, the PEG ratio tells us that ABC Industries stock price is higher than its earnings growth. This means that if the company doesn't grow at a faster rate, the stock price will decrease. XYZ Micro's PEG ratio of 0.75 tells us that the company's stock is undervalued, which means it's trading in line with the growth rate and the stock price will increase. Stock theory suggests that the stock market should assign a PEG ratio of 1 to every stock. This would represent theoretical equilibrium between the market value of a stock and anticipated earnings growth. For example, a stock with an earnings multiple of 20 and 20% anticipated earnings growth would have a PEG ratio of 1. (To learn more, see Introduction To Fundamental Analysis .) PEG ratio results greater than 1 suggest one of the following:
The market's expectation of growth is higher than consensus estimates.
The stock is currently overvalued due to heightened demand for shares.
PEG ratio results of less than 1 suggest one of the following:
Markets are underestimating growth and the stock is undervalued .
Analysts' consensus estimates are currently set too low.
A great feature of the PEG ratio is that by bringing future growth ex
ROE Calculation A company's ROE ratio is calculated by dividing the company's net income by its shareholder equity , or book value . The formula is simple: Net Income/Average Common Equity* *Total assets less total liabilities You can find net income on the income statement , but you can also take the sum of the last four quarters worth of earnings. Shareholders equity, meanwhile, is located on the balance sheet and is simply the difference between total assets and total liabilities . Shareholder equity represents the tangible assets that have been produced by the business. Both net income and shareholder equity should cover the same period of time.