Investors Appear Satisfied With Empreendimentos Pague Menos S.A.'s (BVMF:PGMN3) Prospects As Shares Rocket 25%

Empreendimentos Pague Menos S.A. (BVMF:PGMN3) shares have had a really impressive month, gaining 25% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 34%.

After such a large jump in price, given close to half the companies in Brazil have price-to-earnings ratios (or "P/E's") below 9x, you may consider Empreendimentos Pague Menos as a stock to avoid entirely with its 30.6x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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Empreendimentos Pague Menos could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for Empreendimentos Pague Menos

Keen to find out how analysts think Empreendimentos Pague Menos' future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The High P/E?

Empreendimentos Pague Menos' P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered a frustrating 44% decrease to the company's bottom line. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. 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 45% per year during the coming three years according to the eight analysts following the company. With the market only predicted to deliver 16% per year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Empreendimentos Pague Menos' 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 Key Takeaway

Empreendimentos Pague Menos' P/E is flying high just like its stock has during the last month. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Empreendimentos Pague Menos maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

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

If you're unsure about the strength of Empreendimentos Pague Menos' 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.