Improved Earnings Required Before EcoRodovias Infraestrutura e Logística S.A. (BVMF:ECOR3) Stock's 28% Jump Looks Justified

EcoRodovias Infraestrutura e Logística S.A. (BVMF:ECOR3) shares have continued their recent momentum with a 28% gain in the last month alone. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 7.1% over the last year.

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 5.3x 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.

We've discovered 4 warning signs about EcoRodovias Infraestrutura e Logística. View them for free.

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.

View our latest analysis for EcoRodovias Infraestrutura e Logística

Keen to find out how analysts think EcoRodovias Infraestrutura e Logística's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The Low P/E?

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

If we review the last year of earnings growth, the company posted a terrific increase of 59%. The latest three year period has also seen an excellent 120% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 8.2% per annum during the coming three years according to the seven analysts following the company. Meanwhile, the broader market is forecast to expand by 14% each year, which paints a poor picture.

In light of this, it's understandable that EcoRodovias Infraestrutura e Logística's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On 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. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of EcoRodovias Infraestrutura e Logística's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. 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 take the next step, you should know about the 4 warning signs for EcoRodovias Infraestrutura e Logística (2 don't sit too well with us!) that we have uncovered.

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.