Ultrapar Participações S.A.'s (BVMF:UGPA3) Share Price Not Quite Adding Up

There wouldn't be many who think Ultrapar Participações S.A.'s (BVMF:UGPA3) price-to-earnings (or "P/E") ratio of 13.1x is worth a mention when the median P/E in Brazil is similar at about 12x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Ultrapar Participações certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

View 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.

Is There Some Growth For Ultrapar Participações?

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 an exceptional 116% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 982% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 7.6% each year during the coming three years according to the analysts following the company. Meanwhile, the broader market is forecast to expand by 21% per annum, 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. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.

The Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

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.

It is also worth noting that we have found 3 warning signs for Ultrapar Participações (1 makes us a bit uncomfortable!) that you need to take into consideration.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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.