CSN Mineração S.A.'s (BVMF:CMIN3) Business Is Trailing The Market But Its Shares Aren't

With a price-to-earnings (or "P/E") ratio of 13.8x CSN Mineração S.A. (BVMF:CMIN3) may be sending bearish signals at the moment, given that almost half of all companies in Brazil have P/E ratios under 11x and even P/E's lower than 7x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, CSN Mineração has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for CSN Mineração

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Is There Enough Growth For CSN Mineração?

The only time you'd be truly comfortable seeing a P/E as high as CSN Mineração's is when the company's growth is on track to outshine the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 11% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 10% overall drop in EPS. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 1.8% per year during the coming three years according to the eleven analysts following the company. With the market predicted to deliver 22% growth each year, that's a disappointing outcome.

In light of this, it's alarming that CSN Mineração's 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 Bottom Line On CSN Mineração'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.

We've established that CSN Mineração currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for CSN Mineração (1 can't be ignored) you should be aware of.

If you're unsure about the strength of CSN Mineração's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.