São Carlos Empreendimentos e Participações S.A. (BVMF:SCAR3) Surges 38% Yet Its Low P/E Is No Reason For Excitement

São Carlos Empreendimentos e Participações S.A. (BVMF:SCAR3) shares have had a really impressive month, gaining 38% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 34% in the last year.

In spite of the firm bounce in price, given about half the companies in Brazil have price-to-earnings ratios (or "P/E's") above 10x, you may still consider São Carlos Empreendimentos e Participações as an attractive investment with its 6x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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São Carlos Empreendimentos e Participações has been doing a decent job lately as it's been growing earnings at a reasonable pace. It might be that many expect the respectable earnings performance to degrade, which has repressed the P/E. 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 out of favour.

Check out our latest analysis for São Carlos Empreendimentos e Participações

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 São Carlos Empreendimentos e Participações' earnings, revenue and cash flow.

How Is São Carlos Empreendimentos e Participações' Growth Trending?

In order to justify its P/E ratio, São Carlos Empreendimentos e Participações would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings growth, the company posted a worthy increase of 6.3%. Although, the latest three year period in total hasn't been as good as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 22% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's understandable that São Carlos Empreendimentos e Participações' P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Key Takeaway

Despite São Carlos Empreendimentos e Participações' shares building up a head of steam, its P/E still lags most other companies. 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.

We've established that São Carlos Empreendimentos e Participações maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 2 warning signs for São Carlos Empreendimentos e Participações (1 is concerning!) that we have uncovered.

If you're unsure about the strength of São Carlos Empreendimentos e Participações' 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.