Getting In Cheap On Vitru Brasil Empreendimentos, Participações e Comércio S.A (BVMF:VTRU3) Might Be Difficult

When close to half the companies in Brazil have price-to-earnings ratios (or "P/E's") below 9x, you may consider Vitru Brasil Empreendimentos, Participações e Comércio S.A (BVMF:VTRU3) as a stock to avoid entirely with its 38.1x 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.

While the market has experienced earnings growth lately, Vitru Brasil Empreendimentos Participações e Comércio's earnings have gone into reverse gear, which is not great. 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.

See our latest analysis for Vitru Brasil Empreendimentos Participações e Comércio

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Vitru Brasil Empreendimentos Participações e Comércio.

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 Vitru Brasil Empreendimentos Participações e Comércio'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 64%. As a result, earnings from three years ago have also fallen 87% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 52% per year over the next three years. That's shaping up to be materially higher than the 15% per annum growth forecast for the broader market.

With this information, we can see why Vitru Brasil Empreendimentos Participações e Comércio is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Vitru Brasil Empreendimentos Participações e Comércio's P/E

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 Vitru Brasil Empreendimentos Participações e Comércio 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.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Vitru Brasil Empreendimentos Participações e Comércio (1 is potentially serious!) that you should be aware of before investing here.

You might be able to find a better investment than Vitru Brasil Empreendimentos Participações e Comércio. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.