Direcional Engenharia S.A. (BVMF:DIRR3) Looks Just Right With A 25% Price Jump

Despite an already strong run, Direcional Engenharia S.A. (BVMF:DIRR3) shares have been powering on, with a gain of 25% in the last thirty days. The last 30 days bring the annual gain to a very sharp 87%.

After such a large jump in price, Direcional Engenharia may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 14.1x, since almost half of all companies in Brazil have P/E ratios under 9x and even P/E's lower than 6x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

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Recent times have been advantageous for Direcional Engenharia as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Direcional Engenharia

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

How Is Direcional Engenharia's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Direcional Engenharia'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%. The latest three year period has also seen an excellent 316% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the twelve analysts covering the company suggest earnings should grow by 21% each year over the next three years. That's shaping up to be materially higher than the 16% each year growth forecast for the broader market.

With this information, we can see why Direcional Engenharia is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

Direcional Engenharia shares have received a push in the right direction, but its P/E is elevated too. 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.

As we suspected, our examination of Direcional Engenharia's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Before you settle on your opinion, we've discovered 2 warning signs for Direcional Engenharia that you should be aware of.

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.