Subdued Growth No Barrier To CPFL Energia S.A.'s (BVMF:CPFE3) Price

With a median price-to-earnings (or "P/E") ratio of close to 8x in Brazil, you could be forgiven for feeling indifferent about CPFL Energia S.A.'s (BVMF:CPFE3) P/E ratio of 7.4x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

CPFL Energia could be doing better as it's been growing earnings less than most other companies lately. One possibility is that the P/E is moderate because investors think this lacklustre earnings performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

Check out our latest analysis for CPFL Energia

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How Is CPFL Energia's Growth Trending?

CPFL Energia's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. Still, the latest three year period was better as it's delivered a decent 24% overall rise in EPS. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 13% as estimated by the nine analysts watching the company. With the market predicted to deliver 14% growth , that's a disappointing outcome.

In light of this, it's somewhat alarming that CPFL Energia's P/E sits in line with 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 on the share price eventually.

The Final Word

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 CPFL Energia currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. Right now we are uncomfortable with the P/E as the predicted future earnings are unlikely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You should always think about risks. Case in point, we've spotted 2 warning signs for CPFL Energia you should be aware of.

If you're unsure about the strength of CPFL Energia'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.