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 avoid entirely with its 29.6x P/E ratio. 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, Patria Investments' 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Patria Investments' Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Patria Investments' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 47% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 56% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 195% over the next year. That's shaping up to be materially higher than the 15% growth forecast for the broader market.

In light of this, it's understandable that Patria Investments' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Patria Investments maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Patria Investments (of which 1 shouldn't be ignored!) you should know about.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.