What EZTEC Empreendimentos e Participações S.A.'s (BVMF:EZTC3) 29% Share Price Gain Is Not Telling You

EZTEC Empreendimentos e Participações S.A. (BVMF:EZTC3) shares have continued their recent momentum with a 29% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 38%.

Even after such a large jump in price, there still wouldn't be many who think EZTEC Empreendimentos e Participações' price-to-earnings (or "P/E") ratio of 8.8x is worth a mention when the median P/E in Brazil is similar at about 10x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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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. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. 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.

See our latest analysis for EZTEC Empreendimentos e Participações

If you'd like to see what analysts are forecasting going forward, you should check out our free report on EZTEC Empreendimentos e Participações.

What Are Growth Metrics Telling Us About The P/E?

In order to justify its P/E ratio, EZTEC Empreendimentos e Participações would need to produce growth that's similar to the market.

Retrospectively, the last year delivered an exceptional 85% gain to the company's bottom line. The latest three year period has also seen a 24% overall rise in EPS, aided extensively by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 2.7% each year during the coming three years according to the nine analysts following the company. Meanwhile, the rest of the market is forecast to expand by 16% per annum, which is noticeably more attractive.

With this information, we find it interesting that EZTEC Empreendimentos e Participações is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

EZTEC Empreendimentos e Participações' stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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 EZTEC Empreendimentos e Participações' analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for EZTEC Empreendimentos e Participações that you should be aware of.

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

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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.