Localiza Rent a Car S.A.'s (BVMF:RENT3) P/E Is Still On The Mark Following 26% Share Price Bounce

Localiza Rent a Car S.A. (BVMF:RENT3) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 36% over that time.

Following the firm bounce in price, Localiza Rent a Car may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 20.2x, since almost half of all companies in Brazil have P/E ratios under 8x and even P/E's lower than 6x are not unusual. 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 could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out 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.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Localiza Rent a Car's is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 3.3%. As a result, earnings from three years ago have also fallen 37% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 45% per year as estimated by the twelve analysts watching the company. That's shaping up to be materially higher than the 15% per annum growth forecast for the broader market.

With this information, we can see why Localiza Rent a Car 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 Key Takeaway

The strong share price surge has got Localiza Rent a Car's P/E rushing to great heights as well. 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.

As we suspected, our examination of Localiza Rent a Car's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Localiza Rent a Car that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.