Growth expectations for BYD Company Limited (HKG:1211) are high, but many investors are starting to ask whether its last close at HK$51.35 can still be rationalized by the future potential. Below I will be talking through a basic metric which will help answer this question.
View our latest analysis for BYD
How is 1211 going to perform in the future?
The excitement around BYD’s growth potential is not unfounded. The consensus forecast from 17 analysts is extremely bullish with earnings per share estimated to surge from current levels of CN¥0.940 to CN¥0.992 over the next three years. On average, this leads to a growth rate of 19% each year, which illustrates a highly optimistic outlook in the near term.
Is 1211 available at a good price after accounting for its growth?
As Warren Buffett’s right-hand man Charlie Munger said, “No matter how wonderful a business is, it’s not worth an infinite price.” BYD is available at price-to-earnings ratio of 46.76x, showing us it is overvalued compared to the HK market average ratio of 10.96x , and overvalued based on current earnings compared to the Auto industry average of 9.44x .
After looking at 1211’s value based on current earnings, we can see it seems overvalued relative to other companies in the industry. But, to be able to properly assess the value of a high-growth stock such as BYD, 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 46.76x and expected year-on-year earnings growth of 19% give BYD a quite high PEG ratio of 2.47x. So, when we include the growth factor in our analysis, BYD appears overvalued , based on its fundamentals.
What this means for you:
1211’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 1211’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 1211 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 1211’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 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.