Why We're Not Concerned Yet About Oncoclínicas do Brasil Serviços Médicos S.A.'s (BVMF:ONCO3) 30% Share Price Plunge

Unfortunately for some shareholders, the Oncoclínicas do Brasil Serviços Médicos S.A. (BVMF:ONCO3) share price has dived 30% in the last thirty days, prolonging recent pain. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 83% loss during that time.

Even after such a large drop in price, Oncoclínicas do Brasil Serviços Médicos' price-to-earnings (or "P/E") ratio of 18.6x might still 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 5x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Oncoclínicas do Brasil Serviços Médicos hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. 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

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Oncoclínicas do Brasil Serviços Médicos.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Oncoclínicas do Brasil Serviços Médicos' is when the company's growth is on track to outshine the market decidedly.

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. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next three years should generate growth of 84% per annum as estimated by the ten analysts watching the company. That's shaping up to be materially higher than the 15% per year growth forecast for the broader market.

In light of this, it's understandable that Oncoclínicas do Brasil Serviços Médicos' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

A significant share price dive has done very little to deflate Oncoclínicas do Brasil Serviços Médicos' very lofty P/E. 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.

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. 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.

Before you take the next step, you should know about the 4 warning signs for Oncoclínicas do Brasil Serviços Médicos (2 don't sit too well with us!) that we have uncovered.

Of course, you might also be able to find a better stock than Oncoclínicas do Brasil Serviços Médicos. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.