Investors Appear Satisfied With Lojas Quero-Quero S.A.'s (BVMF:LJQQ3) Prospects

When close to half the companies in Brazil have price-to-earnings ratios (or "P/E's") below 17x, you may consider Lojas Quero-Quero S.A. (BVMF:LJQQ3) as a stock to avoid entirely with its 52.5x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Lojas Quero-Quero certainly has been doing a good job lately as it's been growing earnings more 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 Lojas Quero-Quero

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Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Lojas Quero-Quero's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 81%. The latest three year period has also seen an excellent 191% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 45% during the coming year according to the four analysts following the company. That's shaping up to be materially higher than the 26% growth forecast for the broader market.

With this information, we can see why Lojas Quero-Quero is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Lojas Quero-Quero maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Before you settle on your opinion, we've discovered 2 warning signs for Lojas Quero-Quero that you should be aware 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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