Peter Lynch's PEG ratio
PEG(price/earnings to growth) is a modification of PE(price/earnings) made popular by Peter Lynch. It is basically a ratio, just like the popular PE, but with growth taken into account. PEG ratio is (PE ratio) divided by (annual EPS growth). For stocks in similar sectors, you can use PEG ratio to find value. It adds another component to your analysis and makes it more complete. Below is an example:
OCBC, DBS and UOB as of today have rolling PE ratios of 10.8x, 11.213x and 11.475x respectively. If you were to judge by PE alone, OCBC looks the most attractive and UOB looks the least with DBS in between. The results may look very different if you add earnings growth into the equation.
PEG ratio(PE/EPS CAGR 5years) of OCBC, DBS and UOB are 1.46x, nil(cannot be computed when EPS growth is neg) and 1.42x respectively. With growth taken into account, UOB becomes the most attractive, followed by OCBC then DBS.
PEG explicitly inserts a value on the growth in earnings of a company. It tells you whether high PE translate to overpricing or fast growth. I think it makes for a useful component in day to day analysis.