Engie Brasil Energia S.A.'s (BVMF:EGIE3) Shares May Have Run Too Fast Too Soon

There wouldn't be many who think Engie Brasil Energia S.A.'s (BVMF:EGIE3) price-to-earnings (or "P/E") ratio of 7.1x is worth a mention when the median P/E in Brazil is similar at about 9x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Engie Brasil Energia certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Engie Brasil Energia

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Is There Some Growth For Engie Brasil Energia?

Engie Brasil Energia's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

Retrospectively, the last year delivered an exceptional 23% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 65% 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 slump, contracting by 21% during the coming year according to the nine analysts following the company. Meanwhile, the broader market is forecast to expand by 15%, which paints a poor picture.

In light of this, it's somewhat alarming that Engie Brasil Energia's P/E sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.

The Key Takeaway

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Engie Brasil Energia's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings are unlikely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Engie Brasil Energia (2 are a bit concerning) you should be aware of.

If these risks are making you reconsider your opinion on Engie Brasil Energia, 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.