Azzas 2154 S.A.'s (BVMF:AZZA3) Business Is Trailing The Market But Its Shares Aren't

When close to half the companies in Brazil have price-to-earnings ratios (or "P/E's") below 9x, you may consider Azzas 2154 S.A. (BVMF:AZZA3) as a stock to avoid entirely with its 19.8x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Azzas 2154 as its earnings have been rising faster 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.

See our latest analysis for Azzas 2154

Keen to find out how analysts think Azzas 2154's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Azzas 2154?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Azzas 2154's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 17% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 24% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 15% per annum as estimated by the nine analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 14% per year, which is not materially different.

In light of this, it's curious that Azzas 2154's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Azzas 2154'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 Azzas 2154's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 2 warning signs for Azzas 2154 you should be aware of, and 1 of them is significant.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.