Why We're Not Concerned About Eneva S.A.'s (BVMF:ENEV3) Share Price

When close to half the companies in Brazil have price-to-earnings ratios (or "P/E's") below 17x, you may consider Eneva S.A. (BVMF:ENEV3) as a stock to potentially avoid with its 21.3x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's lofty.

As an illustration, earnings have deteriorated at Eneva over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Eneva

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 Eneva's earnings, revenue and cash flow.

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

Eneva's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 8.9%. Still, the latest three year period has seen an excellent 1,192% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 11% shows it's noticeably more attractive on an annualised basis.

With this information, we can see why Eneva is trading at such a high P/E compared to the market. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

The Final Word

The price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Eneva maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 1 warning sign for Eneva you should be aware of.

If these risks are making you reconsider your opinion on Eneva, 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. 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.
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