Afya Limited's (NASDAQ:AFYA) Subdued P/E Might Signal An Opportunity

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 19x, you may consider Afya Limited (NASDAQ:AFYA) as an attractive investment with its 10.7x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

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With earnings growth that's superior to most other companies of late, Afya has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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Is There Any Growth For Afya?

In order to justify its P/E ratio, Afya would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 42% gain to the company's bottom line. Pleasingly, EPS has also lifted 185% 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.

Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 17% per annum over the next three years. That's shaping up to be materially higher than the 11% per year growth forecast for the broader market.

With this information, we find it odd that Afya is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Bottom Line On Afya's P/E

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.

Our examination of Afya's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Afya with six simple checks on some of these key factors.

If these risks are making you reconsider your opinion on Afya, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.