Fras-le S.A.'s (BVMF:FRAS3) Share Price Not Quite Adding Up

With a price-to-earnings (or "P/E") ratio of 12.9x Fras-le S.A. (BVMF:FRAS3) may be sending bearish signals at the moment, given that almost half of all companies in Brazil have P/E ratios under 9x and even P/E's lower than 6x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Fras-le certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Is There Enough Growth For Fras-le?

The only time you'd be truly comfortable seeing a P/E as high as Fras-le's is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a terrific increase of 48%. As a result, it also grew EPS by 30% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 6.3% each year during the coming three years according to the four analysts following the company. With the market predicted to deliver 18% growth per annum, the company is positioned for a weaker earnings result.

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 hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Fras-le's P/E?

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Fras-le's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Fras-le with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might also be able to find a better stock than Fras-le. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com