What does a company with a lower PEG ratio indicate?

A company with a lower PEG (Price/Earnings to Growth) ratio indicates potential undervaluation relative to its earnings growth. The PEG ratio is a valuation measure that takes into account the price-to-earnings (P/E) ratio divided by the expected earnings growth rate. A lower PEG suggests that the stock may be cheaper compared to its growth prospects, which can be an attractive signal to investors.

Investors often look for stocks with a lower PEG because these companies may represent a good buying opportunity. If a company's growth prospects are strong but the stock is priced lower in relation to those prospects, there’s potential for price appreciation as the market recognizes the company's value. This can occur when the market has not yet fully priced in the expected growth, allowing investors to benefit from both earnings growth and stock price appreciation in the future.

In contrast, a higher PEG ratio might suggest that a company's stock is priced too high relative to its earnings growth, which would indicate overvaluation. Thus, a lower PEG ratio can be a vital sign of investment attractiveness based on growth potential.