FAIR TRADE COFFEE

For a 0% growth company, the fair P/E ratio for the company is not 0. Rather, it is a few percentage above risk-free interest rate or a ten year treasury bond. If a ten year bond is yielding 4.6%, then the fair value of a common stock is at 7.6% yield. Inverting this yield, we get a P/E ratio of 13.2.

Anything else is wrong with using PEG ratio to determine the fair value of a common stock? PEG assumes infinite growth rate in earning per share. No company can grow at the same rate forever. If we assume company A will grow at 10% rate for the next five years and fair trade coffee then growth slows to 2% indefinitely, what is the fair value of the common stock using PEG ratio? The answer is it can't do that. PEG ratio is way too simple to single-handedly assign a fair value for a common stock. It is misleading and fair trade coffee simply wrong to use PEG ratio for our fair value calculation.

Common sense dictates that a stock with higher growth rate should be valued at a higher P/E ratio. There is nothing wrong with that. But using a simple PEG ratio of one as a fair value of a common stock is simply wrong. I don't have an accurate way to calculate this but an estimation can be read on other articles entitled Calculating Fair Value with Growth and fair trade coffee Fair Value with Negative Growth.