A new statistic – The 1YPEG

Normally a PEG ratio is the PE ratio divided by the estimated average earnings growth rate for the next five years (lower is better, of course) . But that’s a total guess! No one knows what a company’s average earnings growth rate will be for five years.

I think a more useful ratio would be a One Year PEG looking backward. In other words, **the one year trailing PE divided by the one year trailing earnings growth rate**. It has the disadvantage or flaw that you are looking backward, but at least you are using a real number, NOT A GUESS. Who would have dreamed at the end of 2012 that ELLI would have an essentially zero earnings growth rate over the next two years? Or that SKX would have 1500% earnings growth in the next two years? I guarantee you, no one! A five year estimate is nonsense.

Here are some examples. (A growth rate the same as the PE gives a PEG of 1.0. A faster growth rate gives a lower PEG. A slower growth rate gives a higher PEG).

AMBA has a current PE of 37.8 divided by earnings growth last year of 80%, so its 1YPEG is 37.8/80 = .47

BOFI has a PE of 21.2 divided by an earnings growth of 39% so its 1YPEG is .54

EPAM has a PE of 30.5 divided by an earnings growth of 34% so its 1YPEG is .90

SWKS has a PE of 25.1 divided by an earnings growth of 64% so its 1YPEG is .39

FB has a PE of 47.8 divided by an earnings growth of 94% so its 1YPEG is .51

MIDD has a PE of 30.9 divided by an earnings growth of 24.5% so its 1YPEG is 1.26

SKX has a PE of 24.4 and earnings growth of 158% so a 1YPEG of .15

UA has a PE of 88.6 and earnings growth of 27% so a 1YPEG of 3.28 (huge).

This is important because you can see that for every dollar invested SKX gave 21 times as much growth of earnings as UA (3.28/0.15). (Or you can think of it as 6 times the earnings growth times 3.6 times smaller PE (dollars paid per earnings dollar) gives 21 times more growth per dollar invested).

Saul