Smartfit Escola de Ginástica e Dança S.A.'s (BVMF:SMFT3) Share Price Could Signal Some Risk

With a price-to-earnings (or "P/E") ratio of 15.2x Smartfit Escola de Ginástica e Dança S.A. (BVMF:SMFT3) may be sending very bearish signals at the moment, given that almost half of all companies in Brazil have P/E ratios under 9x and even P/E's lower than 6x 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.

Recent times have been advantageous for Smartfit Escola de Ginástica e Dança as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Smartfit Escola de Ginástica e Dança

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Does Growth Match The High P/E?

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.

Retrospectively, the last year delivered an exceptional 120% gain to the company's bottom line. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. 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 7.3% each year during the coming three years according to the eleven analysts following the company. Meanwhile, the rest of the market is forecast to expand by 16% each year, which is noticeably more attractive.

With this information, we find it concerning that Smartfit Escola de Ginástica e Dança is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Smartfit Escola de Ginástica e Dança's P/E?

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Smartfit Escola de Ginástica e Dança's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. 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. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Smartfit Escola de Ginástica e Dança that you need to be mindful of.

If these risks are making you reconsider your opinion on Smartfit Escola de Ginástica e Dança, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.