Patria Investments Limited's (NASDAQ:PAX) Share Price Not Quite Adding Up

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 19x, you may consider Patria Investments Limited (NASDAQ:PAX) as a stock to potentially avoid with its 28.9x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

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Patria Investments 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 Patria Investments

Keen to find out how analysts think Patria Investments' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Patria Investments?

The only time you'd be truly comfortable seeing a P/E as high as Patria Investments' is when the company's growth is on track to outshine the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 3.1%. Regardless, EPS has managed to lift by a handy 9.2% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Shifting to the future, estimates from the five analysts covering the company suggest earnings growth is heading into negative territory, declining 10% per year over the next three years. That's not great when the rest of the market is expected to grow by 11% per year.

With this information, we find it concerning that Patria Investments is trading at a P/E higher than the market. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.

The Bottom Line On Patria Investments' P/E

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.

Our examination of Patria Investments' analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a poor outlook with earnings heading backwards, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 3 warning signs for Patria Investments (1 is concerning!) that you should be aware of.

You might be able to find a better investment than Patria Investments. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.