Odontoprev S.A.'s (BVMF:ODPV3) Shares May Have Run Too Fast Too Soon

When close to half the companies in Brazil have price-to-earnings ratios (or "P/E's") below 8x, you may consider Odontoprev S.A. (BVMF:ODPV3) as a stock to potentially avoid with its 11.6x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

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Odontoprev's earnings growth of late has been pretty similar to most other companies. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for Odontoprev

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Does Growth Match The High P/E?

In order to justify its P/E ratio, Odontoprev would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a worthy increase of 9.9%. Pleasingly, EPS has also lifted 39% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 3.0% per annum as estimated by the ten analysts watching the company. With the market predicted to deliver 21% growth per year, the company is positioned for a weaker earnings result.

With this information, we find it concerning that Odontoprev is trading at a P/E higher than the market. 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.

What We Can Learn From Odontoprev's P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Odontoprev'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. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - Odontoprev has 1 warning sign we think you should be aware of.

If you're unsure about the strength of Odontoprev'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.