Companhia Energética do Rio Grande do Norte - COSERN (BVMF:CSRN3) Could Be Riskier Than It Looks

With a price-to-earnings (or "P/E") ratio of 7.2x Companhia Energética do Rio Grande do Norte - COSERN (BVMF:CSRN3) may be sending bullish signals at the moment, given that almost half of all companies in Brazil have P/E ratios greater than 12x and even P/E's higher than 20x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Earnings have risen firmly for Companhia Energética do Rio Grande do Norte - COSERN recently, which is pleasing to see. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. 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.

Check out our latest analysis for Companhia Energética do Rio Grande do Norte - COSERN

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Companhia Energética do Rio Grande do Norte - COSERN's earnings, revenue and cash flow.

Is There Any Growth For Companhia Energética do Rio Grande do Norte - COSERN?

In order to justify its P/E ratio, Companhia Energética do Rio Grande do Norte - COSERN would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 25% gain to the company's bottom line. The latest three year period has also seen an excellent 103% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Comparing that to the market, which is only predicted to deliver 20% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

In light of this, it's peculiar that Companhia Energética do Rio Grande do Norte - COSERN's P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Bottom Line On Companhia Energética do Rio Grande do Norte - COSERN's 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 Energética do Rio Grande do Norte - COSERN currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

You always need to take note of risks, for example - Companhia Energética do Rio Grande do Norte - COSERN has 2 warning signs we think you should be aware of.

If these risks are making you reconsider your opinion on Companhia Energética do Rio Grande do Norte - COSERN, 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.