Ask a Fool: Can I Measure a Company's Growth Potential Based on P/E Ratio?

By Anand Chokkavelu | September 18, 2012

In the spirit of better investing and in celebration of the first Worldwide Invest Better Day coming up on Sept. 25, Motley Fool analysts will be answering user- and reader-submitted questions leading up to the big event. "Ask a Fool" anything, and we'll do our best to help you invest better.

Senior Analyst Anand Chokkavelu responds to the question of how investors should take the price-to-earnings ratio into account when gauging a company's growth value. The P/E ratio is used as an initial way to determine the valuation of a stock, or how cheap it is.

You'd expect to pay more for a company that's going to grow more in the future, while you want to pay less for one without as much growth potential. That's something the P/E ratio doesn't take into account. A better metric to look at is the PEG ratio, for for price-to-earnings growth. Using Amazon.com as an example, Anand walks us through the PEG ratio, as well as other indicators of company growth, in the following video.