Subdued Growth No Barrier To Ultrapar Participações S.A. (BVMF:UGPA3) With Shares Advancing 29%

The Ultrapar Participações S.A. (BVMF:UGPA3) share price has done very well over the last month, posting an excellent gain of 29%. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 8.6% in the last twelve months.

In spite of the firm bounce in price, it's still not a stretch to say that Ultrapar Participações' price-to-earnings (or "P/E") ratio of 7.7x right now seems quite "middle-of-the-road" compared to the market in Brazil, where the median P/E ratio is around 9x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

Recent times haven't been advantageous for Ultrapar Participações as its earnings have been rising slower than most other companies. One possibility is that the P/E is moderate because investors think this lacklustre earnings performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for Ultrapar Participações

Want the full picture on analyst estimates for the company? Then our free report on Ultrapar Participações will help you uncover what's on the horizon.

What Are Growth Metrics Telling Us About The P/E?

The only time you'd be comfortable seeing a P/E like Ultrapar Participações' is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered a decent 3.8% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 205% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to slump, contracting by 3.6% per year during the coming three years according to the analysts following the company. Meanwhile, the broader market is forecast to expand by 16% per year, which paints a poor picture.

With this information, we find it concerning that Ultrapar Participações is trading at a fairly similar P/E to the market. 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 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 Final Word

Its shares have lifted substantially and now Ultrapar Participações' P/E is also back up to the market median. 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 Ultrapar Participações' analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its P/E as much as we would have predicted. When we see a poor outlook with earnings heading backwards, we suspect share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Plus, you should also learn about these 4 warning signs we've spotted with Ultrapar Participações (including 1 which is potentially serious).

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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.