It was originally developed by Mario Farina who wrote about it in his 1969 Book, A Beginner's Guide To Successful Investing In The Stock Market.
PEG ratios calculated from negative present earnings are viewed with skepticism as almost meaningless, other than as an indication of high investment risk.
[6] The PEG ratio is commonly used and provided by numerous sources of financial and stock information.
Use of the coming year's expected growth rate is considered preferable as the most reliable of the future-looking estimates.
Yet which growth rate was selected for calculating a particular published PEG ratio may not be clear, or may require a close reading of the footnotes for the given figure.
It is more apt to be considered when comparing so-called growth companies (those growing earnings significantly faster than the market).
[6] Investors may prefer the PEG ratio because it explicitly puts a value on the expected growth in earnings of a company.
Large, well-established companies, for instance, may offer dependable dividend income, but little opportunity for growth.
Future growth of a company can change due to any number of factors: market conditions, expansion setbacks, and hype of investors.
A sustained higher-than-economy growth rate over the years usually indicates a highly profitable company, but can also indicate a scam, especially if the growth is a flat percentage no matter how the rest of the economy fluctuates (as was the case for several years for returns in Bernie Madoff's Ponzi scheme).