Earnings Tell The Story For Localiza Rent a Car S.A. (BVMF:RENT3)

When close to half the companies in Brazil have price-to-earnings ratios (or "P/E's") below 8x, you may consider Localiza Rent a Car S.A. (BVMF:RENT3) as a stock to avoid entirely with its 16.4x 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.

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With earnings growth that's superior to most other companies of late, Localiza Rent a Car has been doing relatively well. 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.

Check out our latest analysis for Localiza Rent a Car

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Does Growth Match The High P/E?

In order to justify its P/E ratio, Localiza Rent a Car would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 52% gain to the company's bottom line. Still, incredibly EPS has fallen 21% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 38% per annum over the next three years. Meanwhile, the rest of the market is forecast to only expand by 15% per annum, which is noticeably less attractive.

With this information, we can see why Localiza Rent a Car is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Localiza Rent a Car's P/E

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 Localiza Rent a Car 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.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Localiza Rent a Car that you need to be mindful of.

If you're unsure about the strength of Localiza Rent a Car's 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.