There's Reason For Concern Over La Comer, S.A.B. de C.V.'s (BMV:LACOMERUBC) Price

With a price-to-earnings (or "P/E") ratio of 16.3x La Comer, S.A.B. de C.V. (BMV:LACOMERUBC) may be sending bearish signals at the moment, given that almost half of all companies in Mexico have P/E ratios under 11x and even P/E's lower than 6x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's inferior to most other companies of late, La Comer. de has been relatively sluggish. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for La Comer. de

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Is There Enough Growth For La Comer. de?

In order to justify its P/E ratio, La Comer. de would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a worthy increase of 6.3%. The latest three year period has also seen an excellent 70% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 12% each year as estimated by the six analysts watching the company. With the market predicted to deliver 14% growth per year, the company is positioned for a comparable earnings result.

With this information, we find it interesting that La Comer. de is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Key Takeaway

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 La Comer. de currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for La Comer. de with six simple checks on some of these key factors.

Of course, you might also be able to find a better stock than La Comer. de. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.