Does Ricardo plc’s (LON:RCDO) May Stock Price Reflect Its Future Growth?

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Looking at Ricardo plc’s (LON:RCDO) fundamentals some investors are wondering if its last closing price of £7.55 represents a good value for money for this high growth stock. Let’s take a look at some key metrics to determine whether there’s any value here for current and potential future investors.

View our latest analysis for Ricardo

What can we expect from Ricardo in the future?

Investors in Ricardo have been patiently waiting for the uptick in earnings. If you believe the analysts covering the stock then the following year will be very interesting. The consensus forecast from 6 analysts is certainly positive with earnings forecasted to rise significantly from today’s level of £0.350 to £0.561 over the next three years. This results in an annual growth rate of 10%, on average, which signals a market-beating outlook in the upcoming years.

Is RCDO’s share price justified by its earnings growth?

As the legendary value investor Ben Graham once said, “Price is what you pay, value is what you get.” Ricardo is trading at price-to-earnings (PE) ratio of 21.56x, which tells us the stock is overvalued based on current earnings compared to the Professional Services industry average of 18.8x , and overvalued compared to the GB market average ratio of 16.45x .

LSE:RCDO Price Estimation Relative to Market, May 7th 2019
LSE:RCDO Price Estimation Relative to Market, May 7th 2019

We already know that RCDO appears to be overvalued when compared to its industry average. However, seeing as Ricardo 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 21.56x and expected year-on-year earnings growth of 10% give Ricardo a quite high PEG ratio of 2.1x. Based on this growth, Ricardo’s stock can be considered overvalued , based on its fundamentals.

What this means for you:

RCDO’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 urge you to complete your research by taking a look at the following:

  1. Financial Health: Are RCDO’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 RCDO 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 RCDO’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.