Benign Growth For Porto Seguro S.A. (BVMF:PSSA3) Underpins Its Share Price

When close to half the companies in Brazil have price-to-earnings ratios (or "P/E's") above 12x, you may consider Porto Seguro S.A. (BVMF:PSSA3) as an attractive investment with its 8.5x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Porto Seguro as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Porto Seguro

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

Is There Any Growth For Porto Seguro?

The only time you'd be truly comfortable seeing a P/E as low as Porto Seguro's is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 95% last year. The latest three year period has also seen an excellent 33% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 4.9% over the next year. That's shaping up to be materially lower than the 21% growth forecast for the broader market.

In light of this, it's understandable that Porto Seguro's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On Porto Seguro's P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Porto Seguro maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You always need to take note of risks, for example - Porto Seguro has 1 warning sign we think you should be aware of.

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