Adjusting P/E Ratios by Growth and Risk: The PERG Ratio

P/E ratios are one of the tools most widely-used by analysts and the key variable in many value strategies. PEG ratios, an increasingly-popular valuation tool among analysts, improve upon P/E ratios by adjusting the latter by growth. This article proposes a new tool, the PERG ratio, that adjusts P/E ratios by both growth and risk, or, similarly, PEG ratios by risk. The evidence reported shows that PERG-based value strategies outperform, on a risk-adjusted basis, value strategies based on P/E ratios and PEG ratios.