Investors Don't See Light At End Of GPC Participações S.A.'s (BVMF:GPCP3) Tunnel

With a price-to-earnings (or "P/E") ratio of 9.6x GPC Participações S.A. (BVMF:GPCP3) may be sending bullish signals at the moment, given that almost half of all companies in Brazil have P/E ratios greater than 16x and even P/E's higher than 29x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

GPC Participações certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for GPC Participações

Where Does GPC Participações' P/E Sit Within Its Industry?

We'd like to see if P/E's within GPC Participações' industry might provide some colour around the company's low P/E ratio. It turns out the Chemicals industry in general also has a P/E ratio lower than the market, as the graphic below shows. So this certainly goes a fair way towards explaining the company's ratio right now. In the context of the Chemicals industry's current setting, most of its constituents' P/E's would be expected to be toned down. We'd highlight though, the spotlight should be on the anticipated direction of the company's earnings.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on GPC Participações' earnings, revenue and cash flow.

Does Growth Match The Low P/E?

GPC Participações' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 235% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 42% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

This is in contrast to the rest of the market, which is expected to decline by 5.4% over the next year, or less than the company's recent medium-term annualised earnings decline.

In light of this, it's understandable that GPC Participações' P/E sits below the majority of other companies. However, when earnings shrink rapidly P/E often shrinks too, which could set up shareholders for future disappointment regardless. Even just maintaining these prices will be difficult to achieve as recent earnings trends are already weighing down the shares heavily.

The Key Takeaway

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.

As we suspected, our examination of GPC Participações revealed its sharp three-year contraction in earnings is contributing to its low P/E, given the market is set to shrink less severely. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. However, we're still cautious about the company's ability to prevent an acceleration of its recent medium-term course and resist even greater pain to its business from the broader market turmoil. In the meantime, unless the company's relative performance improves, the share price will hit a barrier around these levels.

We don't want to rain on the parade too much, but we did also find 4 warning signs for GPC Participações (1 is significant!) that you need to be mindful of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.

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This article by Simply Wall St is general in nature. 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.
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