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Thanks for watching our video: Finding the Best Value: Tesla, Nvidia, or Apple?

Perhaps the most common valuation metric investors use is the Price-to-Earnings Ratio.

This metric compares the price of 1 share in the company with how much the company earns per share.

So a PE ratio of 10 means that as an investor, you are paying $10 for every $1 in earnings the company generates.

The “Trailing PE” compares the price of a share with the earnings the company generated in the previous 12 months.

But investors in stocks care about the future more than they care about the past.

This is why there is something called the “forward PE”, which compares the price of a share today with the expected earnings per share over the next 12 months.

But investing is about more than just looking 12 months into the future.

This is why there is a third valuation metric called the P/E-to-Growth ratio, which compares the PE ratio of the company with the company’s expected growth over the next 3-5 years.

The way to calculate PEG is to divide the PE of the company by its expected growth rate.

The lower the PEG, the cheaper the company, all else being equal.

The next time you hear someone say Tesla is expensive or some other stock is expensive because it has a high PE without mentioning their expected growth rate, smile and understand they haven’t got a clue what they are talking about.

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