Veste S.A. Estilo's (BVMF:VSTE3) 37% Share Price Surge Not Quite Adding Up

Veste S.A. Estilo (BVMF:VSTE3) shareholders would be excited to see that the share price has had a great month, posting a 37% gain and recovering from prior weakness. Taking a wider view, although not as strong as the last month, the full year gain of 12% is also fairly reasonable.

Following the firm bounce in price, Veste Estilo's price-to-earnings (or "P/E") ratio of 33.1x might make it look like a strong sell right now compared to the market in Brazil, where around half of the companies have P/E ratios below 10x and even P/E's below 5x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

It looks like earnings growth has deserted Veste Estilo recently, which is not something to boast about. It might be that many are expecting an improvement to the uninspiring earnings performance over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Veste Estilo

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

How Is Veste Estilo's Growth Trending?

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

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. The longer-term trend has been no better as the company has no earnings growth to show for over the last three years either. Therefore, it's fair to say that earnings growth has definitely eluded the company recently.

Comparing that to the market, which is predicted to deliver 22% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we find it concerning that Veste Estilo is trading at a P/E higher than the market. 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.

The Key Takeaway

The strong share price surge has got Veste Estilo's P/E rushing to great heights as well. 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 Veste Estilo currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. 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. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You need to take note of risks, for example - Veste Estilo has 3 warning signs (and 2 which are significant) we think you should know about.

If you're unsure about the strength of Veste Estilo's 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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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.