Price Earning Growth Ratio as an Effective Tool in selection of Stocks for Investment – Evidence from Midcap IT Stocks Listed in NSE India

International Journal of Research and Innovation in Social Science (IJRISS) | Volume III, Issue I, January 2019 | ISSN 2454–6186

Price Earning Growth Ratio as an Effective Tool in selection of Stocks for Investment – Evidence from Midcap IT Stocks Listed in NSE India

Dr. P. A. Mary Auxilia

Assistant Professor, Department of Management Studies, Rajalakshmi Engineering College, Chennai, India

Abstract: Investing in stocks is considered very risky if careful analysis of the company’s financial data is not done. Company’s credit worthiness and performance can be analyzed by examining the profit and loss account, balance sheet and cash flow statement. But an easiest tool available to determine the best stocks for investment is PEG (Price earnings to growth) ratio. In this context the research is done to find whether PEG ratio is an effective tool in selecting stocks for investment. Mid cap IT stocks listed in NSE India are selected for the study and PEG ratio is calculated before investment based on EPS CAGR and PE ratio. The performance of the stocks was tracked for five years and the data has been analyzed. The percentage return on investment is compared with market return to determine the efficiency of investment. The study proves that PEG ratio is an effective tool for investment as stocks with PEG less than 1 have given remarkably higher returns compared to the market return. Retail investors can use PEG ratio than PE ratio to identify stocks for investment with higher returns.

Keywords: PEG, MIDCAP Stocks, EPS CAGR.

I. INTRODUCTION

Selecting the right stock for investment is the mantra behind wealth maximization of individual investors. Financial analysis, performance evaluation and decision making has to be done to determine the ideal stock for investment. In that list there is an effective ratio for analysis called the PEG ratio. Price / earnings to growth ratio is a stocks’ price to earnings ratio divided by the growth rate of its earnings for a specified time. PEG ratio gives complete information than a PE ratio. PEG ratio considers both value of stock price and growth rate. The PEG ratio was conceived in the 1960’s by James D. Slater, (Investopedia, 2010). (Lynch, 2000) outlines the benchmark parameters for utilizing the PEG ratio, suggesting that a firm is “fully” valued when its trailing PE ratio approximates its short term growth rate (i.e. PEG = 1.0) and that stocks valued at a PEG < 0.5 are most likely undervalued, while stocks valued above a PEG>2.0 are most likely overvalued. A 2001 Business Week article refers to the PEG as a “useful statistic for comparing “busted” growth stocks” and cites investment fund managers who avidly support the ratio (Braham, 2001).

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