Does The Hype Around Northland Power Inc's (TSE:NPI) Growth Justify Its August Share Price?

Northland Power Inc (TSE:NPI) is considered a high-growth stock, but its last closing price of CA$22.6 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 Northland Power

What can we expect from Northland Power in the future?

One reason why investors are attracted to NPI is the high growth potential in the near future. The consensus forecast from 8 analysts is extremely bullish with earnings per share estimated to rise from today's level of CA$1.266 to CA$2.523 over the next three years. This results in an annual growth rate of 21.3%, on average, which indicates an exceedlingly positive future in the near term.

Is NPI's share price justifiable by its earnings growth?

As the legendary value investor Ben Graham once said, “Price is what you pay, value is what you get.” Northland Power is trading at price-to-earnings (PE) ratio of 17.85x, which tells us the stock is undervalued based on its latest annual earnings update compared to the renewable energy average of 33.26x , and overvalued compared to the CA market average ratio of 16.72x . This multiple is a median of profitable companies of 6 Renewable Energy companies in CA including Pattern Energy Group, Polaris Infrastructure and TransAlta Renewables.

Given that NPI's price-to-earnings of 17.85x lies below the industry average, this already indicates that the company could be potentially undervalued. However, seeing as Northland Power 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 17.85x and expected year-on-year earnings growth of 21.3% give Northland Power a low PEG ratio of 0.84x. This tells us that when we include its growth in our analysis Northland Power's stock can be considered fairly valued , based on fundamental analysis.

What this means for you:

NPI'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 NPI’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 NPI 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 NPI'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.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.