Is PEG Ratio a Better Tool for Valuing the Companies as Compared to P/E Ratio? (A Case Study on Selected Automobile Companies)

Abstract

The securities in the capital markets can be analyzed with the help of Fundamental Analysis or Technical Analysis or both. As for many small investors, technical analysis is a complex tool to be used for analyzing the securities, they basically use fundamental analysis in formulating their effective investment strategies. Fundamental Analysis includes various tools and techniques for making analysis of various securities in which Ratio Analysis is one of them. Investors emphasize on one important ratio i.e. P/E Ratio to have a better understanding on the future growth of a company. P/E i.e. Price Earnings Ratio is calculated by dividing market(stock) price per share by its earning per share. This research paper represents a brief note about P/E and its application in making certain investment decisions. This paper also attempts to focus on a new ratio i.e. PEG innovated by some financial analysts to analyze the growth position of various automobile companies and again a critical analysis of financial statements of selected automobile companies is done to assess its P/E and PEG Ratio. To conclude this paper a comparison is made between the P/E and PEG Ratio to determine whether the newly innovated PEG Ratio is more effective over P/E Ratio.

Keywords: EPS, P/E Ratio, PEG Ratio, Valuation

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