GK Software AG (DB:GKS) is considered a high-growth stock, but its last closing price of €109 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.
How is GKS going to perform in the future?
The excitement around GK Software’s growth potential is not unfounded. The consensus forecast from 3 analysts is extremely bullish with earnings forecasted to rise significantly from today’s level of €2.575 to €6.61 over the next three years. This results in an annual growth rate of 22.93%, on average, which indicates an exceedlingly positive future in the near term.
Is GKS’s share price justifiable by its earnings growth?
GK Software is looking rather expensive based on its price-to-earnings (PE) ratio of 42.32x. This illustrates that GK Software is overvalued compared to the DE market average ratio of 18.84x , and overvalued based on current earnings compared to the software industry average of 36.95x .
We understand GKS seems to be overvalued based on its current earnings, compared to its industry peers. However, to properly examine the value of a high-growth stock such as GK Software, 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 42.32x and expected year-on-year earnings growth of 22.93% give GK Software a higher PEG ratio of 1.85x. This tells us that when we include its growth in our analysis GK Software’s stock can be considered a bit overvalued , based on the fundamentals.
What this means for you:
GKS’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: Is GKS’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 GKS 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 GKS’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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