EcoRodovias Infraestrutura e Logística S.A. (BVMF:ECOR3) Held Back By Insufficient Growth Even After Shares Climb 26%

EcoRodovias Infraestrutura e Logística S.A. (BVMF:ECOR3) shares have continued their recent momentum with a 26% gain in the last month alone. Looking further back, the 24% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Even after such a large jump in price, given about half the companies in Brazil have price-to-earnings ratios (or "P/E's") above 10x, you may still consider EcoRodovias Infraestrutura e Logística as an attractive investment with its 6.6x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

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EcoRodovias Infraestrutura e Logística certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, 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.

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What Are Growth Metrics Telling Us About The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like EcoRodovias Infraestrutura e Logística's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 19%. The latest three year period has also seen an excellent 161% 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 3.1% each year during the coming three years according to the seven analysts following the company. That's shaping up to be materially lower than the 16% per year growth forecast for the broader market.

In light of this, it's understandable that EcoRodovias Infraestrutura e Logística's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From EcoRodovias Infraestrutura e Logística's P/E?

The latest share price surge wasn't enough to lift EcoRodovias Infraestrutura e Logística's P/E close to the market median. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that EcoRodovias Infraestrutura e Logística maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 4 warning signs for EcoRodovias Infraestrutura e Logística (2 are a bit unpleasant!) that you should be aware of.

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).

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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.