Why Investors Shouldn't Be Surprised By Azzas 2154 S.A.'s (BVMF:AZZA3) 33% Share Price Surge

Those holding Azzas 2154 S.A. (BVMF:AZZA3) shares would be relieved that the share price has rebounded 33% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 37% in the last twelve months.

Since its price has surged higher, Azzas 2154's price-to-earnings (or "P/E") ratio of 19.8x 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 8x and even P/E's below 6x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

We've discovered 5 warning signs about Azzas 2154. View them for free.

While the market has experienced earnings growth lately, Azzas 2154's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Azzas 2154

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Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Azzas 2154's is when the company's growth is on track to outshine the market decidedly.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 27%. As a result, earnings from three years ago have also fallen 52% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 29% each year during the coming three years according to the twelve analysts following the company. That's shaping up to be materially higher than the 16% per year growth forecast for the broader market.

In light of this, it's understandable that Azzas 2154's 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.

What We Can Learn From Azzas 2154's P/E?

Shares in Azzas 2154 have built up some good momentum lately, which has really inflated its 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 Azzas 2154 maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

There are also other vital risk factors to consider and we've discovered 5 warning signs for Azzas 2154 (1 shouldn't be ignored!) that you should be aware of before investing here.

Of course, you might also be able to find a better stock than Azzas 2154. 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.