Investors Holding Back On Prio S.A. (BVMF:PRIO3)

With a price-to-earnings (or "P/E") ratio of 6.9x Prio S.A. (BVMF:PRIO3) may be sending bullish signals at the moment, given that almost half of all companies in Brazil have P/E ratios greater than 11x and even P/E's higher than 17x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Prio certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Prio

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

How Is Prio's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Prio's is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a terrific increase of 53%. The strong recent performance means it was also able to grow EPS by 419% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 21% each year as estimated by the analysts watching the company. With the market only predicted to deliver 16% per annum, the company is positioned for a stronger earnings result.

With this information, we find it odd that Prio is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Key Takeaway

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.

We've established that Prio currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Prio with six simple checks on some of these key factors.

If you're unsure about the strength of Prio'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.