Direcional Engenharia S.A.'s (BVMF:DIRR3) Popularity With Investors Is Clear

When close to half the companies in Brazil have price-to-earnings ratios (or "P/E's") below 17x, you may consider Direcional Engenharia S.A. (BVMF:DIRR3) as a stock to potentially avoid with its 21.4x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

There hasn't been much to differentiate Direcional Engenharia's and the market's earnings growth lately. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Direcional Engenharia

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

How Is Direcional Engenharia's Growth Trending?

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

If we review the last year of earnings growth, the company posted a worthy increase of 9.8%. Although, the latest three year period in total hasn't been as good as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 41% per year during the coming three years according to the seven analysts following the company. That's shaping up to be materially higher than the 22% per year growth forecast for the broader market.

In light of this, it's understandable that Direcional Engenharia'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

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

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. It's hard to see the share price falling strongly in the near future under these circumstances.

Plus, you should also learn about these 2 warning signs we've spotted with Direcional Engenharia (including 1 which can't be ignored).

You might be able to find a better investment than Direcional Engenharia. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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