EZTEC Empreendimentos e Participações S.A.'s (BVMF:EZTC3) 26% Share Price Surge Not Quite Adding Up

Despite an already strong run, EZTEC Empreendimentos e Participações S.A. (BVMF:EZTC3) shares have been powering on, with a gain of 26% in the last thirty days. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 5.5% over the last year.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about EZTEC Empreendimentos e Participações' P/E ratio of 8.3x, since the median price-to-earnings (or "P/E") ratio in Brazil is also close to 8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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EZTEC Empreendimentos e Participações certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

View our latest analysis for EZTEC Empreendimentos e Participações

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Is There Some Growth For EZTEC Empreendimentos e Participações?

EZTEC Empreendimentos e Participações' P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 69% last year. Still, incredibly EPS has fallen 2.4% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the eight analysts covering the company suggest earnings growth is heading into negative territory, declining 7.3% over the next year. With the market predicted to deliver 13% growth , that's a disappointing outcome.

In light of this, it's somewhat alarming that EZTEC Empreendimentos e Participações' P/E sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

The Final Word

EZTEC Empreendimentos e Participações appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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 EZTEC Empreendimentos e Participações currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. Right now we are uncomfortable with the P/E as the predicted future earnings are unlikely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for EZTEC Empreendimentos e Participações with six simple checks.

If these risks are making you reconsider your opinion on EZTEC Empreendimentos e Participações, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.