Earnings Working Against Companhia de Saneamento de Minas Gerais' (BVMF:CSMG3) Share Price

Companhia de Saneamento de Minas Gerais' (BVMF:CSMG3) price-to-earnings (or "P/E") ratio of 5.7x might make it look like a buy right now compared to the market in Brazil, where around half of the companies have P/E ratios above 9x and even P/E's above 13x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for Companhia de Saneamento de Minas Gerais as its earnings have been rising slower than most other companies. It seems that many are expecting the uninspiring earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out our latest analysis for Companhia de Saneamento de Minas Gerais

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

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.

If we review the last year of earnings growth, the company posted a worthy increase of 8.1%. The latest three year period has also seen an excellent 89% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 7.3% as estimated by the seven analysts watching the company. Meanwhile, the broader market is forecast to expand by 17%, which paints a poor picture.

With this information, we are not surprised that Companhia de Saneamento de Minas Gerais 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 Final Word

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 Companhia de Saneamento de Minas Gerais' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You always need to take note of risks, for example - Companhia de Saneamento de Minas Gerais has 2 warning signs we think you should be aware of.

If these risks are making you reconsider your opinion on Companhia de Saneamento de Minas Gerais, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.