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華爾街日報Unpleasant Surprises Could Be In Store For GMéxico Transportes, S.A.B. de C.V.'s (BMV:GMXT) Shares
When close to half the companies in Mexico have price-to-earnings ratios (or "P/E's") below 13x, you may consider GMéxico Transportes, S.A.B. de C.V. (BMV:GMXT) as a stock to potentially avoid with its 15.4x 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.
Recent earnings growth for GMéxico Transportes. de has been in line with the market. It might be that many expect the mediocre earnings performance to strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
See our latest analysis for GMéxico Transportes. de
Does Growth Match The High P/E?
The only time you'd be truly comfortable seeing a P/E as high as GMéxico Transportes. de's is when the company's growth is on track to outshine the market.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 8.5% last year. However, due to its less than impressive performance prior to this period, EPS growth is practically non-existent over the last three years overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
Turning to the outlook, the next year should generate growth of 7.4% as estimated by the four analysts watching the company. That's shaping up to be materially lower than the 13% growth forecast for the broader market.
In light of this, it's alarming that GMéxico Transportes. 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. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.
The Final Word
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 GMéxico Transportes. de currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. 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. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for GMéxico Transportes. de with six simple checks will allow you to discover any risks that could be an issue.
You might be able to find a better investment than GMéxico Transportes. de. 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.