RNI Negócios Imobiliários S.A.'s (BVMF:RDNI3) Shareholders Might Be Looking For Exit

With a price-to-earnings (or "P/E") ratio of 42.4x RNI Negócios Imobiliários S.A. (BVMF:RDNI3) may be sending very bearish signals at the moment, given that almost half of all companies in Brazil have P/E ratios under 16x and even P/E's lower than 9x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

RNI Negócios Imobiliários certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for RNI Negócios Imobiliários

Although there are no analyst estimates available for RNI Negócios Imobiliários, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Growth For RNI Negócios Imobiliários?

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

If we review the last year of earnings growth, the company posted a terrific increase of 182%. However, the latest three year period hasn't been as great in aggregate 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.

This is in contrast to the rest of the market, which is expected to grow by 29% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that RNI Negócios Imobiliários' P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

What We Can Learn From RNI Negócios Imobiliários' P/E?

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 RNI Negócios Imobiliários revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 3 warning signs for RNI Negócios Imobiliários (of which 1 is concerning!) you should know about.

If you're unsure about the strength of RNI Negócios Imobiliários' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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