When Is The PEG Ratio Superior To The P/E Ratio? Part 2

On the other hand, a more detailed look at the analysts’ record shows that analysts’ forecasts since 2006 have been extremely accurate.  It is also interesting to note that the number of analysts providing estimates to S&P Capital IQ have increased over this timeframe.

Facebook Inc (NASDAQ:FB)

My final example looks at Facebook from the perspective of the PEG ratio as a valuation metric.  Historical earnings growth has been remarkably high averaging 57.3% per annum.

However, Facebook Inc (NASDAQ:FB) is already a company with a market cap in excess of $376 billion.  Consequently, it seems logical that forecast growth going forward has been reduced to 34.78%.  On the other hand, that is still an exceptionally high forecast growth rate for such a large company.  Nevertheless, based on the current blended P/E ratio of 44 and forecast earnings growth of 34.78%, Facebook Inc (NASDAQ:FB)’s PEG ratio would be considered reasonable at approximately 1.28.

Summary and Conclusions

Financial ratios such as P/E ratios, PEG ratios, price to cash flow ratios, price to sales ratios, price to book ratios and all other ratios should be thought of as tools in the investor’s toolbox.  However, I believe that none of them should be viewed in a vacuum, nor do I believe they should be thought of as a simple statistic.  Instead, investors should understand that these ratios are dynamic and can – and do – change over time.  Consequently, I like to utilize all of these metrics in a relative manner.  This implies examining each metric past, present and future.

Finally, I don’t believe there is one best valuation metric to utilize.  Instead, I believe more insights are gained by examining as many valuation ratios as you can.  At the end of the day, the objective is to try to ascertain whether or not a current investment in a given stock is rational and/or sound.  Investors are best served by utilizing all of the available tools at their disposal.  However, the tools must be practically and appropriately applied to be of true value.  Most importantly, financial ratios and metrics should only be the precursor to a more comprehensive research and due diligence effort before your money is invested.

Disclosure:  Long FB,LKQ,ESRX

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

Note: This article is written by Chuck Carnevale and was originally published at FASTgraphs.com.