Grupo Carso, S.A.B. de C.V.'s (BMV:GCARSOA1) price-to-earnings (or "P/E") ratio of 20.6x might make it look like a strong sell right now compared to the market in Mexico, where around half of the companies have P/E ratios below 12x 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.
Grupo Carso. de has been doing a decent job lately as it's been growing earnings at a reasonable pace. One possibility is that the P/E is high because investors think this good earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.
Check out our latest analysis for Grupo Carso. de
Does Growth Match The High P/E?
In order to justify its P/E ratio, Grupo Carso. de would need to produce outstanding growth well in excess of the market.
Retrospectively, the last year delivered a decent 7.0% gain to the company's bottom line. The solid recent performance means it was also able to grow EPS by 10% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 15% shows it's noticeably less attractive on an annualised basis.
In light of this, it's alarming that Grupo Carso. de's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.
The Bottom Line On Grupo Carso. de's P/E
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We've established that Grupo Carso. de currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.
A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Grupo Carso. de with six simple checks on some of these key factors.
If you're unsure about the strength of Grupo Carso. de's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
Valuation is complex, but we're here to simplify it.
Discover if Grupo Carso. de might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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