Vale S.A.'s (BVMF:VALE3) Earnings Are Not Doing Enough For Some Investors

When close to half the companies in Brazil have price-to-earnings ratios (or "P/E's") above 9x, you may consider Vale S.A. (BVMF:VALE3) as a highly attractive investment with its 2.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Vale certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out 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?

The only time you'd be truly comfortable seeing a P/E as depressed as Vale's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered an exceptional 94% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 860% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 16% per year during the coming three years according to the analysts following the company. That's not great when the rest of the market is expected to grow by 13% each year.

With this information, we are not surprised that Vale is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Vale's P/E

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Vale'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. It's hard to see the share price rising strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Vale (1 can't be ignored!) that you need to be mindful 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 P/E ratio below 20x).

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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.