Subdued Growth No Barrier To Engie Brasil Energia S.A.'s (BVMF:EGIE3) Price

With a median price-to-earnings (or "P/E") ratio of close to 9x in Brazil, you could be forgiven for feeling indifferent about Engie Brasil Energia S.A.'s (BVMF:EGIE3) P/E ratio of 10.6x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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While the market has experienced earnings growth lately, Engie Brasil Energia's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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What Are Growth Metrics Telling Us About The P/E?

The only time you'd be comfortable seeing a P/E like Engie Brasil Energia's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered a frustrating 31% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 71% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Looking ahead now, EPS is anticipated to climb by 6.4% each year during the coming three years according to the eleven analysts following the company. With the market predicted to deliver 17% growth per year, the company is positioned for a weaker earnings result.

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. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

What We Can Learn From Engie Brasil Energia'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.

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. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Engie Brasil Energia (1 is 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.