Getting In Cheap On WEG S.A. (BVMF:WEGE3) Might Be Difficult

When close to half the companies in Brazil have price-to-earnings ratios (or "P/E's") below 15x, you may consider WEG S.A. (BVMF:WEGE3) as a stock to avoid entirely with its 72.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With earnings growth that's superior to most other companies of late, WEG has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for WEG

Does WEG Have A Relatively High Or Low P/E For Its Industry?

It's plausible that WEG's particularly high P/E ratio could be a result of tendencies within its own industry. It turns out the Electrical industry in general also has a P/E ratio higher than the market, as the graphic below shows. So it appears the company's ratio could be influenced somewhat by these industry numbers currently. Some industry P/E's don't move around a lot and right now most companies within the Electrical industry should be getting a boost. Still, the strength of the company's earnings will most likely determine where its P/E shall sit.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on WEG.

How Is WEG's Growth Trending?

WEG's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered an exceptional 28% gain to the company's bottom line. The latest three year period has also seen an excellent 60% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 16% per annum during the coming three years according to the twelve analysts following the company. That's shaping up to be materially higher than the 14% per annum growth forecast for the broader market.

In light of this, it's understandable that WEG's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

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 WEG maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

It is also worth noting that we have found 1 warning sign for WEG that you need to take into consideration.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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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