What is PE RATIO?
Imagine you're buying a toy. The PE ratio is like figuring out how much you're paying for each piece of candy inside the toy. It tells you if a company's stock is cheap or expensive compared to how much money it makes.
What is PEG RATIO?
Now, imagine one toy has a lot of candy and the other has a surprise that makes it even better next year! The PEG ratio is like adding that surprise into the equation. It tells you if the price is worth it because the company is growing faster.
Key Differences
The biggest difference is that the PE ratio just looks at how much money the company is making now, while the PEG ratio also considers how much money it's expected to make in the future. Think of it like this: PE is like a snapshot, and PEG is like a movie.
The PE ratio is easy to calculate: you just divide the stock price by how much money the company makes per share. The PEG ratio is a little trickier because you also need to guess how fast the company will grow.
When to Use Each One
If you're comparing two similar companies, like two different pizza places, the PE ratio is a good place to start. It helps you see which one is cheaper. But if you're comparing a pizza place to a super-fast-growing video game company, the PEG ratio is more helpful. It helps you decide if the video game company's higher price is worth it because it's growing so much faster.
Let's say Company A has a PE ratio of 10 and Company B has a PE ratio of 20. At first, Company A looks cheaper. But if Company B is growing super fast, its PEG ratio might be lower, meaning it's actually a better deal!
The Bottom Line
The PE ratio is a good starting point, but the PEG ratio gives you a more complete picture by including growth. If you're just starting out, focus on understanding the PE ratio first. As you learn more, you can add the PEG ratio to your toolbox. Remember, both are just tools to help you make smart choices!