After Leaping 28% Cruzeiro do Sul Educacional S.A. (BVMF:CSED3) Shares Are Not Flying Under The Radar

Cruzeiro do Sul Educacional S.A. (BVMF:CSED3) shareholders have had their patience rewarded with a 28% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 34% in the last year.

Following the firm bounce in price, Cruzeiro do Sul Educacional's price-to-earnings (or "P/E") ratio of 23.8x 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 11x and even P/E's below 7x 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.

Recent times have been advantageous for Cruzeiro do Sul Educacional as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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How Is Cruzeiro do Sul Educacional's Growth Trending?

In order to justify its P/E ratio, Cruzeiro do Sul Educacional would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 67% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to climb by 185% during the coming year according to the four analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 21%, which is noticeably less attractive.

In light of this, it's understandable that Cruzeiro do Sul Educacional's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Cruzeiro do Sul Educacional's P/E

Shares in Cruzeiro do Sul Educacional have built up some good momentum lately, which has really inflated its P/E. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Cruzeiro do Sul Educacional 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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Cruzeiro do Sul Educacional that you should be aware of.

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

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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.