Is Solaria Energía y Medio Ambiente SA (BME:SLR) Undervalued After Accounting For Its Future Growth?

Solaria Energía y Medio Ambiente SA (BME:SLR) is considered a high-growth stock, but its last closing price of €5.55 left some investors wondering if this high future earnings potential can be rationalized by its current price tag. Let’s look into this by assessing SLR's expected growth over the next few years.

View our latest analysis for Solaria Energía y Medio Ambiente

Where's the growth?

Solaria Energía y Medio Ambiente is poised for significantly high earnings growth in the near future. Expectations from 2 analysts are extremely bullish with earnings forecasted to rise significantly from today's level of €0.204 to €0.299 over the next three years. On average, this leads to a growth rate of 40.6% each year, which indicates an exceedlingly positive future in the near term.

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

SLR is trading at price-to-earnings (PE) ratio of 27.15x, which suggests that Solaria Energía y Medio Ambiente is undervalued based on its latest annual earnings update compared to the renewable energy average of 27.6x , and overvalued compared to the ES market average ratio of 19.36x . This multiple is a median of profitable companies of 4 Renewable Energy companies in ES including Grenergy Renovables, Saeta Yield and Audax Renovables.

Solaria Energía y Medio Ambiente's price-to-earnings ratio stands at 27.15x, which is low, relative to the industry average. This already suggests that the stock could be undervalued. But, since Solaria Energía y Medio Ambiente is a high-growth stock, we must also account for its earnings growth by using calculation called the PEG ratio. A PE ratio of 27.15x and expected year-on-year earnings growth of 40.6% give Solaria Energía y Medio Ambiente a very low PEG ratio of 0.67x. This means that, when we account for Solaria Energía y Medio Ambiente's growth, the stock can be viewed as relatively cheap , based on its fundamentals.

What this means for you:

SLR'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 SLR’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 SLR 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 SLR'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.