Investors Appear Satisfied With Smartfit Escola de Ginástica e Dança S.A.'s (BVMF:SMFT3) Prospects

When close to half the companies in Brazil have price-to-earnings ratios (or "P/E's") below 8x, you may consider Smartfit Escola de Ginástica e Dança S.A. (BVMF:SMFT3) as a stock to avoid entirely with its 27.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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Smartfit Escola de Ginástica e Dança hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for Smartfit Escola de Ginástica e Dança

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Is There Enough Growth For Smartfit Escola de Ginástica e Dança?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Smartfit Escola de Ginástica e Dança's to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 40%. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 39% each year during the coming three years according to the eleven analysts following the company. With the market only predicted to deliver 17% per year, the company is positioned for a stronger earnings result.

With this information, we can see why Smartfit Escola de Ginástica e Dança is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

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 Smartfit Escola de Ginástica e Dança maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Plus, you should also learn about these 2 warning signs we've spotted with Smartfit Escola de Ginástica e Dança (including 1 which is potentially serious).

If you're unsure about the strength of Smartfit Escola de Ginástica e Dança's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.