Earnings Tell The Story For Kepler Weber S.A. (BVMF:KEPL3)

Kepler Weber S.A.'s (BVMF:KEPL3) price-to-earnings (or "P/E") ratio of 24.5x might make it look like a strong sell right now compared to the market in Brazil, where around half of the companies have P/E ratios below 15x and even P/E's below 9x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Recent times have been quite advantageous for Kepler Weber as its earnings have been rising very briskly. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Kepler Weber

Where Does Kepler Weber's P/E Sit Within Its Industry?

It's plausible that Kepler Weber's particularly high P/E ratio could be a result of tendencies within its own industry. It turns out the Machinery industry in general has a P/E ratio lower than the market, as the graphic below shows. So it appears the company's ratio isn't currently influenced by these industry numbers whatsoever. In the context of the Machinery industry's current setting, most of its constituents' P/E's would be expected to be toned down. Whilst this can be a heavy component, industry factors are normally secondary to company financials and earnings.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Kepler Weber will help you shine a light on its historical performance.

How Is Kepler Weber's Growth Trending?

In order to justify its P/E ratio, Kepler Weber would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 83% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

In contrast to the company, the rest of the market is expected to decline by 4.9% over the next year, which puts the company's recent medium-term positive growth rates in a good light for now.

With this information, we can see why Kepler Weber is trading at a high P/E compared to the market. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse. However, its current earnings trajectory will be very difficult to maintain against the headwinds other companies are facing at the moment.

The Key Takeaway

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Kepler Weber maintains its high P/E on the strength of its recentthree-year growth beating forecasts for a struggling market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. We still remain cautious about the company's ability to stay its recent course and swim against the current of the broader market turmoil. Otherwise, it's hard to see the share price falling strongly in the near future if its earnings performance persists.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Kepler Weber (of which 1 is significant!) you should know about.

You might be able to find a better investment than Kepler Weber. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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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. 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. Simply Wall St has no position in any stocks mentioned.
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