Biffa plc (LON:BIFF) is considered a high-growth stock, but its last closing price of £2.035 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.
Has the BIFF train has slowed down?
Biffa is poised for significantly high earnings growth in the near future. Expectations from 5 analysts are extremely bullish with earnings per share estimated to rise from today’s level of £0.106 to £0.166 over the next three years. On average, this leads to a growth rate of 15% each year, which signals a market-beating outlook in the upcoming years.
Is BIFF’s share price justified by its earnings growth?
BIFF is trading at price-to-earnings (PE) ratio of 19.27x, which suggests that Biffa is undervalued based on its latest annual earnings update compared to the commercial services average of 25.69x , and overvalued compared to the GB market average ratio of 15.73x .
Given that BIFF’s price-to-earnings of 19.27x lies below the industry average, this already indicates that the company could be potentially undervalued. However, to be able to properly assess the value of a high-growth stock such as Biffa, 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 19.27x and expected year-on-year earnings growth of 15% give Biffa a higher PEG ratio of 1.26x. This tells us that when we include its growth in our analysis Biffa’s stock can be considered slightly overvalued , based on the fundamentals.
What this means for you:
BIFF’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:
- Financial Health: Are BIFF’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.
- Valuation: What is BIFF worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether BIFF is currently mispriced by the market.
- 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 firstname.lastname@example.org.