In volatile markets, PEG ratio emerges as the real valuation test

Subscribe to enjoy similar stories.In a volatile market like present times — marked by global uncertainties, intermittent buying at dips, foreign outflows, and fluctuating risk appetite — valuations are under constant scrutiny.In this backdrop, the PEG ratio is emerging as a much-needed reality check by tying price more closely to growth.The PEG or (Price/Earnings-to-Growth) ratio compares a stock’s P/E multiple with its expected earnings growth, typically over the next couple of years, to assess whether its valuation is justified.A PEG around 1 is seen as fair value, below 1 may indicate undervaluation, and above 1 could signal overpricing — helping investors separate genuine growth stories from stocks that look expensive without enough momentum, explained market participants.When money chases growth stocks, PEG helps assess whether high P/E multiples are justified by earnings growth, since a rise in P/E only makes sense if earnings grow at a similar pace, explained Rohit Srivastava, founder and market strategist at equity-research firm indiacharts.com.Aniruddha Sarkar, co-founder & CIO, Equinova Investment Managers, pointed out that companies with low P/E but high PEG ratios may look cheap at first glance but lack the growth to justify it.In contrast, stocks with high P/E but low PEG ratios usually reflect strong earnings momentum, where the premium is backed by solid growth prospectsm he added.For instance, La Opala trades at a trailing P/E of 18.6 with a steep PEG of 27.8, suggesting limited growth support, while 360 One WAM, despite a higher P/E of 34.8, has a more reasonable PEG of 1.5.

Force Motors stands out even more, with a P/E of 30.3 but a low PEG of 0.3, indicating strong growth backing its valuation, he