Dexco S.A.'s (BVMF:DXCO3) Earnings Are Not Doing Enough For Some Investors

With a price-to-earnings (or "P/E") ratio of 7.5x Dexco S.A. (BVMF:DXCO3) may be sending bullish signals at the moment, given that almost half of all companies in Brazil have P/E ratios greater than 12x and even P/E's higher than 20x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Dexco hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for Dexco

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

Does Growth Match The Low P/E?

Dexco's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than 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 34%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 92% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 38% as estimated by the seven analysts watching the company. That's not great when the rest of the market is expected to grow by 21%.

In light of this, it's understandable that Dexco's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Dexco's analyst forecasts revealed that its outlook for shrinking earnings 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.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Dexco (1 is concerning!) that you should be aware of before investing here.

You might be able to find a better investment than Dexco. 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.