Investors Still Waiting For A Pull Back In TOTVS S.A. (BVMF:TOTS3)

When close to half the companies in Brazil have price-to-earnings ratios (or "P/E's") below 11x, you may consider TOTVS S.A. (BVMF:TOTS3) as a stock to avoid entirely with its 37.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

TOTVS 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for TOTVS

If you'd like to see what analysts are forecasting going forward, you should check out our free report on TOTVS.

Does Growth Match The High P/E?

TOTVS' 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.

Retrospectively, the last year delivered a decent 13% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 90% in total over the last three years. 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 45% during the coming year according to the nine analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 20%, which is noticeably less attractive.

In light of this, it's understandable that TOTVS' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From TOTVS' P/E?

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of TOTVS' 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.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for TOTVS with six simple checks on some of these key factors.

If you're unsure about the strength of TOTVS' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.