Investor Optimism Abounds Fras-le S.A. (BVMF:FRAS3) But Growth Is Lacking

Fras-le S.A.'s (BVMF:FRAS3) price-to-earnings (or "P/E") ratio of 61.4x 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 17x and even P/E's below 9x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

For example, consider that Fras-le's financial performance has been poor lately as it's earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Fras-le

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Fras-le's earnings, revenue and cash flow.

Does Growth Match The High P/E?

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

Retrospectively, the last year delivered a frustrating 67% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 74% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 11% shows it's an unpleasant look.

With this information, we find it concerning that Fras-le is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Bottom Line On Fras-le's P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Fras-le currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 4 warning signs for Fras-le (1 shouldn't be ignored!) that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.

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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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