Benign Growth For Companhia de Saneamento de Minas Gerais (BVMF:CSMG3) Underpins Its Share Price

With a price-to-earnings (or "P/E") ratio of 5.4x Companhia de Saneamento de Minas Gerais (BVMF:CSMG3) may be sending bullish signals at the moment, given that almost half of all companies in Brazil have P/E ratios greater than 10x and even P/E's higher than 16x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Companhia de Saneamento de Minas Gerais has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.

See our latest analysis for Companhia de Saneamento de Minas Gerais

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

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Companhia de Saneamento de Minas Gerais would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 37% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 59% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the six analysts covering the company suggest earnings growth is heading into negative territory, declining 5.3% per annum over the next three years. That's not great when the rest of the market is expected to grow by 18% per annum.

In light of this, it's understandable that Companhia de Saneamento de Minas Gerais' 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. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From Companhia de Saneamento de Minas Gerais' P/E?

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Companhia de Saneamento de Minas Gerais maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. 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 Companhia de Saneamento de Minas Gerais (of which 1 is a bit unpleasant!) you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com