A Rising Share Price Has Us Looking Closely At Grupo SBF S.A.'s (BVMF:CNTO3) P/E Ratio

It's really great to see that even after a strong run, Grupo SBF (BVMF:CNTO3) shares have been powering on, with a gain of 38% in the last thirty days. That's tops off a massive gain of 174% in the last year.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that deep value investors might steer clear when expectations of a company are too high. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

View our latest analysis for Grupo SBF

How Does Grupo SBF's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 22.15 that there is some investor optimism about Grupo SBF. As you can see below, Grupo SBF has a higher P/E than the average company (13.2) in the specialty retail industry.

Grupo SBF's P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

In the last year, Grupo SBF grew EPS like Taylor Swift grew her fan base back in 2010; the 64% gain was both fast and well deserved. The sweetener is that the annual five year growth rate of 145% is also impressive. With that kind of growth rate we would generally expect a high P/E ratio.

Remember: P/E Ratios Don't Consider The Balance Sheet

The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

Is Debt Impacting Grupo SBF's P/E?

The extra options and safety that comes with Grupo SBF's R$71m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

The Verdict On Grupo SBF's P/E Ratio

Grupo SBF trades on a P/E ratio of 22.1, which is above its market average of 14.5. The excess cash it carries is the gravy on top its fast EPS growth. So based on this analysis we'd expect Grupo SBF to have a high P/E ratio. What we know for sure is that investors have become much more excited about Grupo SBF recently, since they have pushed its P/E ratio from 16.1 to 22.1 over the last month. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.

When the market is wrong about a stock, it gives savvy investors an opportunity. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

You might be able to find a better buy than Grupo SBF. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. 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. Thank you for reading.