Greentown Service Group Co. Ltd. (HKG:2869): Can Growth Justify Its January Share Price?

Looking at Greentown Service Group Co. Ltd.’s (HKG:2869) fundamentals some investors are wondering if its last closing price of HK$6.86 represents a good value for money for this high growth stock. Let’s look into this by assessing 2869's expected growth over the next few years.

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What can we expect from 2869 in the future?

The excitement around Greentown Service Group's growth potential is not unfounded. Expectations from 13 analysts are extremely bullish with earnings forecasted to rise significantly from today's level of CN¥0.158 to CN¥0.303 over the next three years. This indicates an estimated earnings growth rate of 18% per year, on average, which indicates an exceedlingly positive future in the near term.

Is 2869 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.” Greentown Service Group is available at price-to-earnings ratio of 37.49x, showing us it is overvalued compared to the HK market average ratio of 10.38x , and overvalued based on current earnings compared to the Commercial Services industry average of 12.89x .

We understand 2869 seems to be overvalued based on its current earnings, compared to its industry peers. But, to properly examine the value of a high-growth stock such as Greentown Service Group, we must reflect its earnings growth into the valuation. I find that the PEG ratio is simple yet effective for this exercise. A PE ratio of 37.49x and expected year-on-year earnings growth of 18% give Greentown Service Group a quite high PEG ratio of 2.14x. This means that, when we account for Greentown Service Group's growth, the stock can be viewed as overvalued , based on the fundamentals.

What this means for you:

2869'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 2869’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 2869 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 2869'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.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.