Subdued Growth No Barrier To Ultrapar Participações S.A.'s (BVMF:UGPA3) Price

When close to half the companies in Brazil have price-to-earnings ratios (or "P/E's") below 10x, you may consider Ultrapar Participações S.A. (BVMF:UGPA3) as a stock to potentially avoid with its 12.4x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Ultrapar Participações as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Ultrapar Participações

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

How Is Ultrapar Participações' Growth Trending?

In order to justify its P/E ratio, Ultrapar Participações would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 62%. Pleasingly, EPS has also lifted 298% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 0.08% per annum during the coming three years according to the twelve analysts following the company. That's shaping up to be materially lower than the 15% per year growth forecast for the broader market.

With this information, we find it concerning that Ultrapar Participações is trading at a P/E higher than 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 growth outlook.

What We Can Learn From Ultrapar Participações' P/E?

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 inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware Ultrapar Participações is showing 3 warning signs in our investment analysis, and 1 of those can't be ignored.

You might be able to find a better investment than Ultrapar Participações. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.