Investors Still Waiting For A Pull Back In Localiza Rent a Car S.A. (BVMF:RENT3)

Localiza Rent a Car S.A.'s (BVMF:RENT3) price-to-earnings (or "P/E") ratio of 35.8x might make it look like a strong sell right now compared to the market in Brazil, where around half of the companies have P/E ratios below 10x and even P/E's below 7x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Localiza Rent a Car hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Localiza Rent a Car

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Localiza Rent a Car.

How Is Localiza Rent a Car's Growth Trending?

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 a frustrating 31% decrease to the company's bottom line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 26% overall rise in EPS. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Turning to the outlook, the next year should generate growth of 113% as estimated by the eleven analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 22%, which is noticeably less attractive.

In light of this, it's understandable that Localiza Rent a Car's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

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. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 5 warning signs for Localiza Rent a Car (3 don't sit too well with us) 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 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.