Little Excitement Around Vale S.A.'s (BVMF:VALE3) Earnings

When close to half the companies in Brazil have price-to-earnings ratios (or "P/E's") above 12x, you may consider Vale S.A. (BVMF:VALE3) as an attractive investment with its 7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Vale could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. 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 Vale

Want the full picture on analyst estimates for the company? Then our free report on Vale will help you uncover what's on the horizon.

Is There Any Growth For Vale?

There's an inherent assumption that a company should underperform the market for P/E ratios like Vale's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 44%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 321% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next year should generate growth of 19% as estimated by the analysts watching the company. With the market predicted to deliver 22% growth , the company is positioned for a weaker earnings result.

In light of this, it's understandable that Vale'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 Vale'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 Vale maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Vale (of which 1 shouldn't be ignored!) you should know about.

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