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Clarkson PLC (LON:CKN) is considered a high-growth stock, but its last closing price of £24.5 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 CKN train has slowed down?
Investors in Clarkson 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 4 analysts is bullish with earnings forecasted to rise significantly from today’s level of £0.989 to £1.345 over the next three years. This results in an annual growth rate of 10%, on average, which illustrates an optimistic outlook in the near term.
Is CKN’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.” Clarkson is trading at price-to-earnings (PE) ratio of 24.78x, which tells us the stock is overvalued based on current earnings compared to the Shipping industry average of 13.92x , and overvalued compared to the GB market average ratio of 16.17x .
After looking at CKN’s value based on current earnings, we can see it seems overvalued relative to other companies in the industry. However, seeing as Clarkson 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 24.78x and expected year-on-year earnings growth of 10% give Clarkson a quite high PEG ratio of 2.43x. This means that, when we account for Clarkson’s growth, the stock can be viewed as overvalued , based on fundamental analysis.
What this means for you:
CKN’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:
- Financial Health: Are CKN’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.
- Past Track Record: Has CKN 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 CKN’s historicals for more clarity.
- 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 firstname.lastname@example.org. 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.