Pinning Down Sul América S.A.'s (BVMF:SULA11) P/E Is Difficult Right Now

When close to half the companies in Brazil have price-to-earnings ratios (or "P/E's") below 15x, you may consider Sul América S.A. (BVMF:SULA11) as a stock to potentially avoid with its 17.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Sul América could be doing better as it's been growing earnings less than most other companies lately. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. If not, then existing shareholders may be very nervous about the viability of the share price.

View our latest analysis for Sul América

Where Does Sul América's P/E Sit Within Its Industry?

It's plausible that Sul América's high P/E ratio could be a result of tendencies within its own industry. It turns out the Insurance industry in general has a P/E ratio lower than the market, as the graphic below shows. So we'd say there is practically no merit in the premise that the company's ratio being shaped by its industry at this time. In the context of the Insurance industry's current setting, most of its constituents' P/E's would be expected to be toned down. However, what is happening on the company's own income statement is the most important factor to its P/E.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Sul América.

How Is Sul América's Growth Trending?

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

If we review the last year of earnings growth, the company posted a worthy increase of 5.1%. This was backed up an excellent period prior to see EPS up by 40% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 6.5% each year during the coming three years according to the six analysts following the company. That's shaping up to be materially lower than the 14% each year growth forecast for the broader market.

In light of this, it's alarming that Sul América'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

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 Sul América currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Sul América with six simple checks.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.

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