China Telecom Corporation Limited (HKG:728) is considered a high-growth stock, but its last closing price of HK$4.36 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.
What can we expect from China Telecom in the future?According to the analysts covering the company, the following few years should bring about good growth prospects for China Telecom. Expectations from 22 analysts are bullish with earnings forecasted to rise significantly from today’s level of CN¥0.243 to CN¥0.353 over the next three years. This indicates an estimated earnings growth rate of 13% per year, on average, which indicates a solid future in the near term.
Is 728 available at a good price after accounting for its growth?
Stocks like China Telecom, with a price-to-earnings (P/E) ratio of 15.36x, 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 728 is overvalued compared to the HK market average ratio of 10.79x , and undervalued based on its latest annual earnings update compared to the Telecom average of 15.48x .
We already know that 728 appears to be undervalued based on its PE ratio, compared to the industry average. However, seeing as China Telecom 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 15.36x and expected year-on-year earnings growth of 13% give China Telecom an acceptable PEG ratio of 1.19x. Based on this growth, China Telecom’s stock can be considered slightly overvalued , based on the fundamentals.
What this means for you:
728’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 728’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 728 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 728’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.
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If you spot an error that warrants correction, please contact the editor at email@example.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.