Porto Seguro S.A.'s (BVMF:PSSA3) Shares Lagging The Market But So Is The Business

Porto Seguro S.A.'s (BVMF:PSSA3) price-to-earnings (or "P/E") ratio of 7.6x might make it look like a buy right now compared to the market in Brazil, where around half of the companies have P/E ratios above 10x and even P/E's above 17x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times have been advantageous for Porto Seguro as its earnings have been rising faster than most other companies. 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.

Check out 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.

What Are Growth Metrics Telling Us About The Low P/E?

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

Retrospectively, the last year delivered an exceptional 96% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 48% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 2.7% per annum as estimated by the seven analysts watching the company. With the market predicted to deliver 20% growth each year, the company is positioned for a weaker earnings result.

With this information, we can see why Porto Seguro is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

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.

As we suspected, our examination of Porto Seguro's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You should always think about risks. Case in point, we've spotted 2 warning signs for Porto Seguro you should be aware of, and 1 of them is potentially serious.

You might be able to find a better investment than Porto Seguro. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com