Rede D'Or São Luiz S.A. (BVMF:RDOR3) Investors Are Less Pessimistic Than Expected

When close to half the companies in Brazil have price-to-earnings ratios (or "P/E's") below 8x, you may consider Rede D'Or São Luiz S.A. (BVMF:RDOR3) as a stock to avoid entirely with its 20.5x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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With earnings growth that's superior to most other companies of late, Rede D'Or São Luiz has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Is There Enough Growth For Rede D'Or São Luiz?

Rede D'Or São Luiz's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 30% last year. The latest three year period has also seen an excellent 181% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 17% each year during the coming three years according to the eleven analysts following the company. With the market predicted to deliver 17% growth each year, the company is positioned for a comparable earnings result.

In light of this, it's curious that Rede D'Or São Luiz's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

What We Can Learn From Rede D'Or São Luiz's P/E?

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Rede D'Or São Luiz's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Rede D'Or São Luiz with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on Rede D'Or São Luiz, 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.