The Price Is Right For Companhia de Locação das Américas (BVMF:LCAM3)

With a price-to-earnings (or "P/E") ratio of 42.9x Companhia de Locação das Américas (BVMF:LCAM3) may be sending very bearish signals at the moment, given that almost half of all companies in Brazil have P/E ratios under 16x and even P/E's lower than 8x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Companhia de Locação das Américas could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Companhia de Locação das Américas

Keen to find out how analysts think Companhia de Locação das Américas' future stacks up against the industry? In that case, our free report is a great place to start.

What Are Growth Metrics Telling Us About The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Companhia de Locação das Américas' to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 9.8%. Even so, admirably EPS has lifted 159% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Turning to the outlook, the next three years should generate growth of 27% each year as estimated by the eight analysts watching the company. That's shaping up to be materially higher than the 20% each year growth forecast for the broader market.

In light of this, it's understandable that Companhia de Locação das Américas' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Companhia de Locação das Américas' 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.

As we suspected, our examination of Companhia de Locação das Américas' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

It is also worth noting that we have found 4 warning signs for Companhia de Locação das Américas (1 doesn't sit too well with us!) that you need to take into consideration.

If you're unsure about the strength of Companhia de Locação das Américas' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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