Vale S.A.'s (BVMF:VALE3) Business And Shares Still Trailing The Market

With a price-to-earnings (or "P/E") ratio of 7.3x Vale S.A. (BVMF:VALE3) may be sending bullish signals at the moment, given that almost half of all companies in Brazil have P/E ratios greater than 11x and even P/E's higher than 18x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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.

View our latest analysis for Vale

Keen to find out how analysts think Vale's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Vale's Growth Trending?

In order to justify its P/E ratio, Vale would need to produce sluggish growth that's trailing 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 44%. As a result, earnings from three years ago have also fallen 31% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 2.5% per year over the next three years. With the market predicted to deliver 16% growth each year, the company is positioned for a weaker earnings result.

With this information, we can see why Vale 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 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 Vale'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.

Before you settle on your opinion, we've discovered 2 warning signs for Vale that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.