Is Southern Cross Electrical Engineering Limited's (ASX:SXE) Growth Strong Enough To Justify Its March Share Price?

Southern Cross Electrical Engineering Limited (ASX:SXE) is a stock well-positioned for future growth, but many investors are wondering whether its last closing price of A$0.54 is based on unrealistic expectations. Below I will be talking through a basic metric which will help answer this question.

See our latest analysis for Southern Cross Electrical Engineering

Should you get excited about SXE's future?

If you are bullish about Southern Cross Electrical Engineering's growth potential then you are certainly not alone. Analyst expectations are extremely bullish with earnings per share estimated to surge from current levels of A$0.0439 to A$0.0630 over the next three years. On average, this leads to a growth rate of 15% each year, which illustrates a highly optimistic outlook in the near term.

Can SXE's share price be justified by its earnings growth?

Southern Cross Electrical Engineering is trading at quite low price-to-earnings (PE) ratio of 12.29x. This tells us the stock is undervalued relative to the current AU market average of 16.33x , and undervalued based on its latest annual earnings update compared to the Construction average of 16.78x .

We already know that SXE appears to be undervalued based on its PE ratio, compared to the industry average. However, seeing as Southern Cross Electrical Engineering is perceived as a high-growth stock, we must also account for its earnings growth, which is captured in the PEG ratio. A PE ratio of 12.29x and expected year-on-year earnings growth of 15% give Southern Cross Electrical Engineering a low PEG ratio of 0.80x. Based on this growth, Southern Cross Electrical Engineering's stock can be considered fairly valued , based on the fundamentals.

What this means for you:

SXE's current undervaluation could signal a potential buying opportunity to increase your exposure to the stock, or it you're a potential investor, now may 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 urge you to complete your research by taking a look at the following:

1. Financial Health: Are SXE’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 SXE 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 SXE'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.