Improved Earnings Required Before Companhia de Saneamento de Minas Gerais (BVMF:CSMG3) Shares Find Their Feet

When close to half the companies in Brazil have price-to-earnings ratios (or "P/E's") above 12x, you may consider Companhia de Saneamento de Minas Gerais (BVMF:CSMG3) as an attractive investment with its 6.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times have been advantageous for Companhia de Saneamento de Minas Gerais as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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.

How Is Companhia de Saneamento de Minas Gerais' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Companhia de Saneamento de Minas Gerais' is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered an exceptional 102% gain to the company's bottom line. The latest three year period has also seen an excellent 61% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to slump, contracting by 4.5% during the coming year according to the six analysts following the company. That's not great when the rest of the market is expected to grow by 21%.

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

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.

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. 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.

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 potentially serious!) 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.