Rede D'Or São Luiz S.A.'s (BVMF:RDOR3) P/E Is On The Mark

With a price-to-earnings (or "P/E") ratio of 18.4x Rede D'Or São Luiz S.A. (BVMF:RDOR3) may be sending very bearish signals at the moment, given that almost half of all companies in Brazil have P/E ratios under 8x and even P/E's lower than 6x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

We check all companies for important risks. See what we found for Rede D'Or São Luiz in our free report.

Rede D'Or São Luiz certainly has been doing a good job lately as it's been growing earnings more than most other companies. 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.

Check out our latest analysis for Rede D'Or São Luiz

Want the full picture on analyst estimates for the company? Then our free report on Rede D'Or São Luiz will help you uncover what's on the horizon.

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

The only time you'd be truly comfortable seeing a P/E as steep as Rede D'Or São Luiz's is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, we see that the company grew earnings per share by an impressive 91% last year. The latest three year period has also seen an excellent 117% overall rise in EPS, aided by its short-term performance. 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 19% per annum as estimated by the nine analysts watching the company. With the market only predicted to deliver 16% per annum, 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

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.

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. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Rede D'Or São Luiz with six simple checks.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.