Growth-rate to PE ratio - Deepstash

Growth-rate to PE ratio

A slightly more complicated formula enables us to compare growth rates to earnings, while also taking the dividends into account.

Find the long-term growth rate (say, Company X’s is 12 percent), add the dividend yield (Company X pays 3 percent), and divide by the p/e ratio (Company X’s is 10). 12 plus 3 divided by 10 is 1.5. Less than a 1 is poor, and 1.5 is okay, but what you’re really looking for is a 2 or better.

A company with a 15 percent growth rate, a 3 percent dividend, and a p/e of 6 would have a fabulous 3.

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Thing to remember about PE ratio

In general, a p/e ratio that’s half the growth rate is very positive, and one that’s twice the growth rate is very negative.

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