Pinning Down TOTVS S.A.'s (BVMF:TOTS3) P/E Is Difficult Right Now

Explore TOTVS's Fair Values from the Community and select yours

TOTVS S.A.'s (BVMF:TOTS3) price-to-earnings (or "P/E") ratio of 32.9x 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 8x and even P/E's below 6x 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.

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With earnings growth that's superior to most other companies of late, TOTVS has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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.

What Are Growth Metrics Telling Us About 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 an exceptional 50% gain to the company's bottom line. Pleasingly, EPS has also lifted 100% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 18% per year as estimated by the eleven analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 18% per year, which is not materially different.

With this information, we find it interesting that TOTVS is trading at a high P/E compared to the market. 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.

The Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of TOTVS' 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.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for TOTVS with six simple checks will allow you to discover any risks that could be an issue.

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