Unpleasant Surprises Could Be In Store For Fomento Económico Mexicano, S.A.B. de C.V.'s (BMV:FEMSAUBD) Shares

With a price-to-earnings (or "P/E") ratio of 20.4x Fomento Económico Mexicano, S.A.B. de C.V. (BMV:FEMSAUBD) may be sending very 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 7x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

While the market has experienced earnings growth lately, Fomento Económico Mexicano. de's earnings have gone into reverse gear, which is not great. 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 Fomento Económico Mexicano. de

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Does Growth Match The High P/E?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 16%. Still, the latest three year period has seen an excellent 51% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Turning to the outlook, the next three years should generate growth of 6.5% per year as estimated by the analysts watching the company. That's shaping up to be materially lower than the 15% each year growth forecast for the broader market.

In light of this, it's alarming that Fomento Económico Mexicano. de's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Fomento Económico Mexicano. de's P/E?

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Fomento Económico Mexicano. de's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Fomento Económico Mexicano. de with six simple checks.

If these risks are making you reconsider your opinion on Fomento Económico Mexicano. de, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.