Livetech da Bahia Indústria e Comércio S.A. (BVMF:LVTC3) Investors Are Less Pessimistic Than Expected

With a price-to-earnings (or "P/E") ratio of 63.9x Livetech da Bahia Indústria e Comércio S.A. (BVMF:LVTC3) may be sending very bearish signals at the moment, given that almost half of all companies in Brazil have P/E ratios under 10x and even P/E's lower than 6x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

As an illustration, earnings have deteriorated at Livetech da Bahia Indústria e Comércio over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Livetech da Bahia Indústria e Comércio

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Livetech da Bahia Indústria e Comércio will help you shine a light on its historical performance.

How Is Livetech da Bahia Indústria e Comércio's Growth Trending?

Livetech da Bahia Indústria e Comércio'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.

Retrospectively, the last year delivered a frustrating 71% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 97% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 20% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Livetech da Bahia Indústria e Comércio is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Final Word

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.

Our examination of Livetech da Bahia Indústria e Comércio revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware Livetech da Bahia Indústria e Comércio is showing 6 warning signs in our investment analysis, and 2 of those shouldn't be ignored.

Of course, you might also be able to find a better stock than Livetech da Bahia Indústria e Comércio. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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.