Optimistic Investors Push Empreendimentos Pague Menos S.A. (BVMF:PGMN3) Shares Up 30% But Growth Is Lacking

Empreendimentos Pague Menos S.A. (BVMF:PGMN3) shares have had a really impressive month, gaining 30% after a shaky period beforehand. Unfortunately, despite the strong performance over the last month, the full year gain of 8.6% isn't as attractive.

Following the firm bounce in price, given around 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 potentially avoid with its 13.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Empreendimentos Pague Menos hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for Empreendimentos Pague Menos

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

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Empreendimentos Pague Menos' is when the company's growth is on track to outshine the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 7.7%. This means it has also seen a slide in earnings over the longer-term as EPS is down 32% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to slump, contracting by 29% during the coming year according to the five analysts following the company. With the market predicted to deliver 18% growth , that's a disappointing outcome.

In light of this, it's alarming that Empreendimentos Pague Menos' P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a very 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 Bottom Line On Empreendimentos Pague Menos' P/E

Empreendimentos Pague Menos' P/E is getting right up there since its shares have risen strongly. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Empreendimentos Pague Menos' analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware Empreendimentos Pague Menos is showing 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.