Earnings Tell The Story For Rede D'Or São Luiz S.A. (BVMF:RDOR3)

Rede D'Or São Luiz S.A.'s (BVMF:RDOR3) price-to-earnings (or "P/E") ratio of 35x 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 11x and even P/E's below 7x 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.

Rede D'Or São Luiz'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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Rede D'Or São Luiz

Keen to find out how analysts think Rede D'Or São Luiz's future stacks up against the industry? In that case, our free report is a great place to start.

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 Rede D'Or São Luiz's to be considered reasonable.

Retrospectively, the last year delivered a decent 3.4% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 219% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 45% each year as estimated by the nine analysts watching the company. With the market only predicted to deliver 19% per year, the company is positioned for a stronger earnings result.

With this information, we can see why Rede D'Or São Luiz is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

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 Rede D'Or São Luiz 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.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Rede D'Or São Luiz you should know about.

Of course, you might also be able to find a better stock than Rede D'Or São Luiz. 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.