Investors Appear Satisfied With Grupo SBF S.A.'s (BVMF:SBFG3) Prospects As Shares Rocket 26%

Despite an already strong run, Grupo SBF S.A. (BVMF:SBFG3) shares have been powering on, with a gain of 26% in the last thirty days. The last 30 days bring the annual gain to a very sharp 31%.

Following the firm bounce in price, Grupo SBF's price-to-earnings (or "P/E") ratio of 17.7x 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. 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.

Grupo SBF could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for Grupo SBF

Keen to find out how analysts think Grupo SBF'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?

In order to justify its P/E ratio, Grupo SBF would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 48%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 347% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 42% per annum over the next three years. That's shaping up to be materially higher than the 19% per year growth forecast for the broader market.

In light of this, it's understandable that Grupo SBF's 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 Bottom Line On Grupo SBF's P/E

Grupo SBF's P/E is flying high just like its stock has during the last month. 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 Grupo SBF's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you take the next step, you should know about the 3 warning signs for Grupo SBF (2 are a bit unpleasant!) that we have uncovered.

Of course, you might also be able to find a better stock than Grupo SBF. 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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