Nasdaq
华尔街日报Pinning Down Companhia de Saneamento de Minas Gerais' (BVMF:CSMG3) P/E Is Difficult Right Now
Companhia de Saneamento de Minas Gerais' (BVMF:CSMG3) price-to-earnings (or "P/E") ratio of 12.3x might make it look like a sell right now compared to the market in Brazil, where around half of the companies have P/E ratios below 9x 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 as high as it is.
While the market has experienced earnings growth lately, Companhia de Saneamento de Minas Gerais' earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.
See our latest analysis for Companhia de Saneamento de Minas Gerais
Does Growth Match The High P/E?
The only time you'd be truly comfortable seeing a P/E as high as Companhia de Saneamento de Minas Gerais' is when the company's growth is on track to outshine the market.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 3.5%. Still, the latest three year period has seen an excellent 111% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to slump, contracting by 1.2% during the coming year according to the nine analysts following the company. Meanwhile, the broader market is forecast to expand by 21%, which paints a poor picture.
In light of this, it's alarming that Companhia de Saneamento de Minas Gerais' P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on 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 Companhia de Saneamento de Minas Gerais' analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a poor outlook with earnings heading backwards, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
Before you settle on your opinion, we've discovered 2 warning signs for Companhia de Saneamento de Minas Gerais that you should be aware of.
Of course, you might also be able to find a better stock than Companhia de Saneamento de Minas Gerais. 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.