Is Royal Mail plc's (LON:RMG) Stock Available For A Good Price After Accounting For Growth?

Looking at Royal Mail plc’s (LON:RMG) fundamentals some investors are wondering if its last closing price of £2.24 represents a good value for money for this high growth stock. Below I will be talking through a basic metric which will help answer this question.

See our latest analysis for Royal Mail

Has the RMG train slowed down?

According to the analysts covering the company, the following few years should bring about good growth prospects for Royal Mail. The consensus forecast from 12 analysts is bullish with earnings forecasted to rise significantly from today's level of £0.175 to £0.281 over the next three years. On average, this leads to a growth rate of 13% each year, which indicates a solid future in the near term.

Is RMG's share price justifiable by its earnings growth?

Stocks like Royal Mail, with a price-to-earnings (P/E) ratio of 12.8x, always catch the eye of investors on the hunt for a bargain. In isolation, this metric can be a bit too simplistic but in comparison to benchmarks, it tells us that RMG is undervalued relative to the current GB market average of 16.31x , and undervalued based on its latest annual earnings update compared to the Logistics average of 16.64x .

We already know that RMG appears to be undervalued based on its PE ratio, compared to the industry average. But, to be able to properly assess the value of a high-growth stock such as Royal Mail, 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 12.8x and expected year-on-year earnings growth of 13% give Royal Mail a low PEG ratio of 0.98x. This means that, when we account for Royal Mail's growth, the stock can be viewed as fairly valued , based on the fundamentals.

What this means for you:

RMG'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 highly recommend you to complete your research by taking a look at the following:

1. Financial Health: Are RMG’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 RMG 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 RMG'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.