PEG Ratio - Hindi | #44 Master Investor - YouTube

Press the bell icon while subscribing to the channel

So that you will get the notification of the latest finance videos

Music

Namaskar, my name is Mukul

And you are welcome to the Asset Yogi

Friends this video is the part of a series in which we will discuss the valuation ratios

We learned earnings per share previously, then we saw P/E ratios.

If you haven't watched those videos then I request you

to watch those videos before this one. So that you will understand this video properly

You will find the link in the description. In the last video, we saw in PE ratio

that a company is expensive or cheap in their peer group or

in comparison to their competitors. We get to know that

But what should be the right PE for any company

depends on its growth

How fastly a company is growing?

So what is the relationship between PE and growth?

We will know that by the PEG ratio.

The full form of the PEG ratio is Price Earnings Growth Ratio

So what is the relation between PE and growth?

How much we can pay for a stock?

We will know these things in this video

So let's go straight towards the blackboard

In our last video, we saw the formula of PE ratio

We divide the current market price of the share

by earnings per share then we will get our PE Ratio

So this tells us if the stock is expensive or cheap

in comparison to its competitors

Let's take an example

Assume the PE ratio of any company is 18 and if we take the average of its peer group

Peer group means all the competitors of the company

Or if we calculate the average price-earnings ratio of the industry

And maybe it is 20

So we can say that this stock is a bit cheaper in comparison to its peer group

And at the same time, the PE of other company

can be 25

So then we can say that

this stock is a bit expensive

as compared to its peer group

But the question that arises here is that

whether we purchase this stock or that stock

Is it really this expensive that it is not worth purchasing?

Is it really this cheap that it's worth purchasing?

This depends on the growth rate of the company

So why am I saying this? Understand first what does the price

of the share of any company represents. It represents the market value of the company

All the shareholders in the market are putting how much value of the company

So in a way, it is the net present value of the company

The share price that represents it.

I will give you an example

Let's say the profits of any company are growing

I am writing the figures in crores

Assume it is 10 crores in the first year and then 15 crores

The future growth that we have estimated, maybe it will become 15 crores, 20 crores

25 crores. So we calculate Net Present Value

When we calculate the present value of all these values

Then it is called net present value

And the valuation of our company is this only

We call it market capitalization.

So when you will divide the market capitalization by the number of shares

So what will you get? You will get the share price.

So what does a share price represent? It represents the net

present value of the company means it is telling us the value of the company

Now, what is the most important thing in the Net Present Value?

At what speed, they are growing?

The growth rate is important. So growth rate is very important here.

At what rate, the company is growing?

We can put the net present value of the company according to that only.

We can put a justified valuation.

So the future growth rate of the company becomes very important

when we do valuation of any company

So what is the PEG ratio? It considers the growth of the company

If we want to find out the right price of any company

So if I tell you the formula of PEG then

PE ratio is divided by the growth rate of future earnings

So here, we are stressing over future earnings

I have done it with yellow color

So we will know the PE ratio of any company, we can calculate it easily

Let's take an example. Assume these are the earnings per share of the last 3 years

of any company. This is the current year.

And earnings per share here is 163

And in the year 2, before this year, it was 125

And before that, it was 100

Now what do we want

We have calculated the PE of the current year

That is 25

Now we want to calculate its next year's growth rate

So see, we are talking about future earning

This is an estimate

So what we are assuming

We will assume that we will calculate the growth rate of the last 2 or 3 years

So here it is 125 from 100

So it has grown by 25%. So the growth rate in 2nd year is 25%

In the 3rd year, it went from 125 to 163

So the earnings per share grew by 30%

So we wrote the growth rate here

Now we will assume that the last year's growth rate will be replicated

We will consider that only

Because it is very difficult to predict the future

So we will consider the growth of last year

So we are taking the estimate that it will grow by 30% in the 4th year

And the earnings per share will become 212 from 163

So now if we want to calculate the PEG ratio

So we already know the PE of the current year. It is 25

So we will divide 25 by the current growth rate of profit

We will divide 25 by 30.

So it will be less than 1

So what does less than one mean?

Whenever the PEG ratio is less than one

That means the stock of the company is underpriced

The buying decision goes here

If we say the PEG ratio is equal to one

That means the PE ratio is equal to the growth rate

So we will say that it is a fair price

If the price of any company is this much then we can pay it

If the PEG ratio is more than one

Then we will say that it is an overpriced stock

The sell decisions come in this

So see, assume it is just less than one, assume in this case it is up to 0.8 or 0.9

Then we will say it is fairly priced. But if it is less than 0.5

Then we will say there is a strong buy decision

You can buy these types of stock

whose PEG ratio is less than 0.5

At the same time, if the PEG ratio is more than 2, then there is a strong sell signal

So in this way, you have to calculate the PEG ratio

So if I say this in a simple language

If the PE ratio of any company is more than its growth rate

That means it will be more than one

So the PEG ratio will be more than one

That means it is overpriced stock.

If the PE ratio is less than its growth rate that means it is underpriced stock

You can consider it for buying. But definitely, you have to check other parameters also.

So now we will talk about the limitations of the PEG ratio

Every ratio has its limitations.

That's why I say you should analyze every stock in detail.

So what are the limitations of the PEG ratio?

The first thing is that it depends on the future growth

The future forecast can be wrong sometimes. Many analysts analyze

that this company has this much potential for the future growth

It can grow by 20%, 25% every year

But who has seen the future?

And when we assume the past growth

that it will be replicated in the future

Then it is not necessary. The growth rate can be different in the future.

It can be negative also.

Second, the PEG doesn't consider the dividends

If any company gives very high dividends then maybe its fair

valuation may not come by this growth or by this metric.

So that's why the PEG ratio generally works for the company which

are non-dividend-yielding stocks

The second thing, if there are asset-heavy businesses like real estate

or telecom in which your earnings per share can go high or low

If there is any cyclical industry then it can also go up and down

It is very important for us to calculate the value of assets there

So in these cases, the price to book value ratio is better

to calculate with PE ratio. So we will talk about this in the coming video

So I think you understood what is PEG ratio

And how can it help you to set the right value of the stock

And you understood what is its limitations by this video

Now I will quickly show you how to check the PEG ratio online

If any stock is fairly priced or overpriced. So I have opened the financials of Reliance

industries by going to the website of Indian Info Lines

You can find out the details of any stock by going to the search option.

So you are getting the price earning ratio directly

You don't have to calculate it

The current PE of Reliance is 21.1

Now we want to check that the current stock price

The premium that it is commanding on its earnings

Is it justified?

So for that, first we will do peer comparison

We will see that in this industry

This is mainly the refining industry

So what is the PE ratio here? The PE ratio is quite low here

It is 5 or 6 of all companies, Indian Oils

Bharat Petroleum, Hindustan Petroleum

So where we are talking about 5 or 6 PE ratio then why is it high in Reliance Industries

For that, we have to see its financials

If its financials are justifying its high PE ratio

So first, we have to see its net profit

So what is the growth rate of the net profit?

So the growth of the current year is 20.60

which is approximately near 21, which is its current PE ratio.

So we can say at present its PE ratio is justified

But I will say that you should see the PE ratio of the last 2 or 3 years

See the growth rate is quite low here.

Now the question that arises here is that

whether it can maintain the growth rate of 20% or 21%

So maybe it can maintain it

But we have to justify the reason

Because Jio has come into the Reliance Industries then

growth of telecom can be high. See, Reliance Industry is not just a refining

company. We are seeing the consolidated statement in this

So Jio is here. The revolution is going on in the telecom industry

So maybe due to the growth of Jio

Its growth rate can be maintained

That's why the industry is giving a high PE. So in this way, you have to analyze

any industry and check whether its growth rate is justified or not

I hope you liked this video. So like and share it.

If you have any suggestions or you want to suggest a topic for the future videos

Then you can comment below

I read all of your comments regularly and I try to share maximum

topics through videos. So tell me by commenting what other topics should I cover?

I share many finances and investment-related interesting videos daily

So if you haven't subscribed to the channel yet then subscribe from below

And press the bell icon

To get the notification of my latest video

So let's meet in the next video

Till then keep learning, keep earning

And be happy as always