- 1). Calculate a company's earnings per share (EPS). A company's earnings are the same as its net profit. To calculate EPS, divide the earnings of the company in dollars by the current number of outstanding shares of stock. If a company earned $1 million in the last year and has 1 million outstanding shares of stock, the EPS of the company would be $1 per share.
- 2). Determine the price-to-earnings (P/E) ratio. Calculate the P/E ratio with the formula "P/E = Market Price per Share / Earnings per Share" according to the Stern School of Business at New York University. If the company in the above example had a stock price of $10 per share, the P/E ratio would be 10 to 1.
- 3). Consider the growth rate of the company relative to the P/E ratio. Use the P/E ratio to calculate the P/E growth ratio (PEG). According to Investopedia, this ratio "gives a more complete picture of stock valuation than simply viewing the price-earnings (P/E) ratio in isolation." Divide the P/E ratio by the rate of expected growth of the company to calculate the PEG. If the company in the example is expected to grow at a rate of 10 percent in the coming year, the PEG of the company would be 1.
- 4). Calculate the year-ahead PEG (YPEG). This calculation is especially useful for valuing older, more established companies. The YPEG is not based on the P/E ratio calculated in Step 2. YPEG calculates the valuation of the stock based on the estimate of the next-year's P/E ratio, and divides this number by the anticipated growth rate. If the example company has an estimated P/E ratio of 15 for the coming year and estimated growth of 10 percent, the YPEG would be 1.5.
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