More Unpleasant Surprises Could Be In Store For Mosaico Tecnologia ao Consumidor S.A.'s (BVMF:MOSI3) Shares After Tumbling 27% - Simply Wall St

To the annoyance of some shareholders, Mosaico Tecnologia ao Consumidor S.A. (BVMF:MOSI3) shares are down a considerable 27% in the last month, which continues a horrid run for the company. Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.
Even after such a large drop in price, Mosaico Tecnologia ao Consumidor may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 24.2x, since almost half of all companies in Brazil have P/E ratios under 15x and even P/E's lower than 8x are not unusual. 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.
Mosaico Tecnologia ao Consumidor could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. 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.
Check out our latest analysis for Mosaico Tecnologia ao Consumidor
The only time you'd be truly comfortable seeing a P/E as steep as Mosaico Tecnologia ao Consumidor's is when the company's growth is on track to outshine the market decidedly.
Retrospectively, the last year delivered a frustrating 37% decrease to the company's bottom line. Even so, admirably EPS has lifted 454% in aggregate from three years ago, notwithstanding the last 12 months. 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.
Shifting to the future, estimates from the five analysts covering the company suggest earnings growth is heading into negative territory, declining 14% each year over the next three years. That's not great when the rest of the market is expected to grow by 13% per year.
With this information, we find it concerning that Mosaico Tecnologia ao Consumidor is trading at a P/E higher than the market. 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 these declining earnings are likely to weigh heavily on the share price eventually.
Mosaico Tecnologia ao Consumidor's shares may have retreated, but its P/E is still flying high. 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.
We've established that Mosaico Tecnologia ao Consumidor currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. 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.
It is also worth noting that we have found 2 warning signs for Mosaico Tecnologia ao Consumidor that you need to take into consideration.
You might be able to find a better investment than Mosaico Tecnologia ao Consumidor. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
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