Does Renishaw plc’s (LON:RSW) August Stock Price Reflect Its Future Growth?

Renishaw plc (LON:RSW) is considered a high-growth stock, but its last closing price of £36.06 left some investors wondering if this high future earnings potential can be rationalized by its current price tag. Below I will be talking through a basic metric which will help answer this question.

View our latest analysis for Renishaw

What are the future expectations?

According to the analysts covering the company, the following few years should bring about good growth prospects for Renishaw. Expectations from 9 analysts are bullish with earnings per share estimated to surge from current levels of £1.267 to £2.255 over the next three years. On average, this leads to a growth rate of 15% each year, which illustrates an optimistic outlook in the near term.

Is RSW’s share price justifiable by its earnings growth?

Renishaw is available at price-to-earnings ratio of 28.45x, showing us it is overvalued based on current earnings compared to the Electronic industry average of 22.74x , and overvalued compared to the GB market average ratio of 16.06x .

LSE:RSW Price Estimation Relative to Market, August 12th 2019
LSE:RSW Price Estimation Relative to Market, August 12th 2019

We understand RSW seems to be overvalued based on its current earnings, compared to its industry peers. But, to be able to properly assess the value of a high-growth stock such as Renishaw, we must incorporate its earnings growth in our valuation. The PEG ratio is a great calculation to take account of growth in the stock’s valuation. A PE ratio of 28.45x and expected year-on-year earnings growth of 15% give Renishaw a higher PEG ratio of 1.9x. Based on this growth, Renishaw’s stock can be considered a bit overvalued , based on its fundamentals.

What this means for you:

RSW’s current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you’re a potential investor, now may not be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

  1. Financial Health: Are RSW’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  2. Past Track Record: Has RSW been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of RSW’s historicals for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.