Does Medica Group Plc’s (LON:MGP) Stock Price Account For Its Growth?

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Medica Group Plc (LON:MGP) is considered a high-growth stock, but its last closing price of £1.4825 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.

See our latest analysis for Medica Group

How is MGP going to perform in the future?

One reason why investors are attracted to MGP is the high growth potential in the near future. The consensus forecast from 3 analysts is extremely bullish with earnings forecasted to rise significantly from today’s level of £0.0663 to £0.107 over the next three years. This indicates an estimated earnings growth rate of 16% per year, on average, which signals a market-beating outlook in the upcoming years.

Can MGP’s share price be justified by its earnings growth?

Medica Group is available at price-to-earnings ratio of 22.37x, showing us it is undervalued based on its latest annual earnings update compared to the Healthcare average of 25.01x , and overvalued compared to the GB market average ratio of 16.42x .

LSE:MGP Price Estimation Relative to Market, May 2nd 2019
LSE:MGP Price Estimation Relative to Market, May 2nd 2019

Medica Group’s price-to-earnings ratio stands at 22.37x, which is low, relative to the industry average. This already suggests that the stock could be undervalued. But, seeing as Medica Group 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 22.37x and expected year-on-year earnings growth of 16% give Medica Group a higher PEG ratio of 1.39x. This means that, when we account for Medica Group’s growth, the stock can be viewed as slightly overvalued , based on its fundamentals.

What this means for you:

MGP’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 MGP’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 MGP 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 MGP’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.