Companhia de Saneamento de Minas Gerais' (BVMF:CSMG3) Prospects Need A Boost To Lift Shares

When close to half the companies in Brazil have price-to-earnings ratios (or "P/E's") above 10x, you may consider Companhia de Saneamento de Minas Gerais (BVMF:CSMG3) as an attractive investment with its 6x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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Companhia de Saneamento de Minas Gerais 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 Companhia de Saneamento de Minas Gerais

Want the full picture on analyst estimates for the company? Then our free report on Companhia de Saneamento de Minas Gerais will help you uncover what's on the horizon.

Is There Any Growth For Companhia de Saneamento de Minas Gerais?

Companhia de Saneamento de Minas Gerais' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than 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 4.5%. Even so, admirably EPS has lifted 145% in aggregate from three years ago, notwithstanding the last 12 months. 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.

Looking ahead now, EPS is anticipated to climb by 7.2% during the coming year according to the nine analysts following the company. Meanwhile, the rest of the market is forecast to expand by 12%, which is noticeably more attractive.

With this information, we can see why Companhia de Saneamento de Minas Gerais is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

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.

As we suspected, our examination of Companhia de Saneamento de Minas Gerais' 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.

You need to take note of risks, for example - Companhia de Saneamento de Minas Gerais has 3 warning signs (and 1 which is concerning) we think you should know about.

If you're unsure about the strength of Companhia de Saneamento de Minas Gerais' 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.