Earnings Tell The Story For Oncoclínicas do Brasil Serviços Médicos S.A. (BVMF:ONCO3) As Its Stock Soars 124%

Oncoclínicas do Brasil Serviços Médicos S.A. (BVMF:ONCO3) shares have had a really impressive month, gaining 124% after a shaky period beforehand. But the last month did very little to improve the 51% share price decline over the last year.

After such a large jump in price, Oncoclínicas do Brasil Serviços Médicos' price-to-earnings (or "P/E") ratio of 42.8x might make it look like a strong sell right now compared to the market in Brazil, where around half of the companies have P/E ratios below 8x and even P/E's below 6x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Oncoclínicas do Brasil Serviços Médicos could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. 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.

View our latest analysis for Oncoclínicas do Brasil Serviços Médicos

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What Are Growth Metrics Telling Us About The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Oncoclínicas do Brasil Serviços Médicos' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 71% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the eleven analysts covering the company suggest earnings should grow by 243% over the next year. With the market only predicted to deliver 13%, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Oncoclínicas do Brasil Serviços Médicos' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

Oncoclínicas do Brasil Serviços Médicos' P/E is flying high just like its stock has during the last month. 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.

As we suspected, our examination of Oncoclínicas do Brasil Serviços Médicos' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 4 warning signs for Oncoclínicas do Brasil Serviços Médicos (2 are potentially serious!) that you need to be mindful of.

If these risks are making you reconsider your opinion on Oncoclínicas do Brasil Serviços Médicos, 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.