Adjusting P/E ratios by growth
and risk: the PERG ratio
IESE Business School, Barcelona, Spain
Purpose – The purpose of this study is to compare the performance of a low-P/E strategy relative to
that of two alternative value strategies, one based on the PEG ratio and another on the PERG ratio (a
magnitude introduced in this article).
Design/methodology/approach – The data used consists of a sample of 100 US companies
between January 1975 and September 2002. Portfolios are formed on the basis of different valuation
ratios, and their performance is compared in order to determine the best-performing strategy.
Findings – Portfolios sorted by PERG ratios outperform, on a risk-adjusted basis, those sorted by
both P/E ratios and PEG ratios. This outperformance occurs regardless of whether portfolios are not
rebalanced, rebalanced every ten years, or rebalanced every ﬁve years.
Research limitations/implications – The sample of stocks is not large. The results could be
validated by using a larger sample of US stocks and a longer time period, as well as by using a sample
of stocks from several international markets.
Practical implications – The PERG ratio proposed in this article improves on the PEG ratio,
adjusting the latter by risk. That, plus the fact that PERG-based strategies outperform on a
risk-adjusted basis strategies based on both P/Es and PEGs, should make it an attractive tool to add to
the arsenal of valuation tools used by analysts.
Originality/value – A new valuation tool is proposed, called the PERG ratio, that adjusts P/E ratios
by both growth and risk (or, similarly, PEG ratios by risk).
Keywords Price earning ratio, Business development, Strategic objectives, Numerical analysis
Paper type Research paper
The so-called internet bubble became, in a way, the short-lived revenge of
growth-oriented investors. For many years, practitioners and academics produced a
vast number of studies showing the superiority of value strategies over growth
strategies. Then, in the second half of the 1990s, even Warren Buffett seemed to have
gone out of fashion.
After three consecutive down markets (2000, 2001, and 2002), however, value
investors came back with a vengeance. At the same time, growth investors went
AWOL, growth companies gave up most of the gains accumulated during the bull
market, and even long-forgotten dividends came back into fashion.
Despite this rollercoaster of up and down markets, there seems to be a wide
consensus about the fact that value strategies outperform growth strategies in both the
US and in other countries. Capaul et al. (1993) report that value outperformed growth in
the US, Japan, and Europe by an average of 40 percent over the period 1981-1992.
Bauman et al. (1998) extend the previous study in terms of time (1985-1996) and
coverage (21 countries) and conﬁrm that value outperforms growth, though not
necessarily in every country or every year. Many other studies report results consistent
with these ﬁndings.
The Emerald Research Register for this journal is available at The current issue and full text archive of this journal is available at
ratios: the PERG
International Journal of Managerial
Vol. 1 No. 3, 2005
q Emerald Group Publishing Limited