Calculating Peter Lynch’s PEGY ratio

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the expected earnings growth rate should be forward looking; there are a few ways you can do this: – you can use the historical rates to find an average annual growth rate or even the CAGR (though this assumes the future growth rate will mimic the past) – you can forecast based on fundamentals i.e. create a model for the income statement where you can make assumptions for the revenue growth, expenses etc. and see what the future earnings growth will be based on your assumptions (subject to errors and biases) – a generic method of calculating earnings growth is ROE * (1 – DPR). As an example a company that has an ROE of 20% and pays out a dividend of 0.10 on earnings of 1 would have a g of 20%*(1-0.1) = 4.5%. Think of it as the growth rate of its earnings will be the earnings they retained (1-DPR) times the return on the retained amount (ROE). So you can forecast each of these metrics to find g – use the consensus estimate (this could be the base of your exercise, and then you can add to/subtract from the growth rate if you believe earnings growth will be different)


Why do you use EPS instead of earnings growth?


Apple EPS in % is 3.17%. The “EPS” of 10.2% you have listed is the growth of the EPS year/year. You want the expected earnings growth rate and should therefore take the “EPS next Y” (expected earning growth next year) which is 5.17%. Also I think your formula does not take interest into account? Anyway, from your lynch PEGY ratio, apple should expect a correction of about -80% to be “fair-valued”.


Is there any ELI5 version?


Wow guys you all ate just smashing Thank you so much for the examples and illustrations God Bless