Engie Brasil Energia S.A.'s (BVMF:EGIE3) Share Price Could Signal Some Risk

It's not a stretch to say that Engie Brasil Energia S.A.'s (BVMF:EGIE3) price-to-earnings (or "P/E") ratio of 9.9x right now seems quite "middle-of-the-road" compared to the market in Brazil, where the median P/E ratio is around 10x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

With earnings growth that's superior to most other companies of late, Engie Brasil Energia has been doing relatively well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. 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 not quite in favour.

See our latest analysis for Engie Brasil Energia

Keen to find out how analysts think Engie Brasil Energia's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Some Growth For Engie Brasil Energia?

In order to justify its P/E ratio, Engie Brasil Energia would need to produce growth that's similar to the market.

If we review the last year of earnings growth, the company posted a terrific increase of 82%. The strong recent performance means it was also able to grow EPS by 41% in total over the last three years. 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 climb by 3.2% during the coming year according to the eight analysts following the company. Meanwhile, the rest of the market is forecast to expand by 23%, which is noticeably more attractive.

In light of this, it's curious that Engie Brasil Energia's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

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.

Our examination of Engie Brasil Energia's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

You need to take note of risks, for example - Engie Brasil Energia has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.