Some Shareholders Feeling Restless Over Profarma Distribuidora de Produtos Farmacêuticos S.A.'s (BVMF:PFRM3) P/E Ratio

It's not a stretch to say that Profarma Distribuidora de Produtos Farmacêuticos S.A.'s (BVMF:PFRM3) price-to-earnings (or "P/E") ratio of 9.2x right now seems quite "middle-of-the-road" compared to the market in Brazil, where the median P/E ratio is around 9x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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With earnings growth that's exceedingly strong of late, Profarma Distribuidora de Produtos Farmacêuticos has been doing very well. The P/E is probably moderate because investors think this strong earnings growth might not be enough to outperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

View our latest analysis for Profarma Distribuidora de Produtos Farmacêuticos

Although there are no analyst estimates available for Profarma Distribuidora de Produtos Farmacêuticos, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Some Growth For Profarma Distribuidora de Produtos Farmacêuticos?

The only time you'd be comfortable seeing a P/E like Profarma Distribuidora de Produtos Farmacêuticos' is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a terrific increase of 30%. EPS has also lifted 24% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 16% shows it's noticeably less attractive on an annualised basis.

In light of this, it's curious that Profarma Distribuidora de Produtos Farmacêuticos' P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Bottom Line On Profarma Distribuidora de Produtos Farmacêuticos' 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 Profarma Distribuidora de Produtos Farmacêuticos currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are uncomfortable with the P/E as this earnings performance isn't likely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

You need to take note of risks, for example - Profarma Distribuidora de Produtos Farmacêuticos has 2 warning signs (and 1 which is significant) we think you should know about.

Of course, you might also be able to find a better stock than Profarma Distribuidora de Produtos Farmacêuticos. 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.