Equatorial Pará Distribuidora de Energia S.A. (BVMF:EQPA3) Could Be Riskier Than It Looks

With a price-to-earnings (or "P/E") ratio of 6.2x Equatorial Pará Distribuidora de Energia S.A. (BVMF:EQPA3) may be sending bullish signals at the moment, given that almost half of all companies in Brazil have P/E ratios greater than 9x and even P/E's higher than 14x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

The earnings growth achieved at Equatorial Pará Distribuidora de Energia over the last year would be more than acceptable for most companies. 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 Equatorial Pará Distribuidora de Energia

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 Equatorial Pará Distribuidora de Energia's earnings, revenue and cash flow.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Equatorial Pará Distribuidora de Energia's is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 22% last year. The strong recent performance means it was also able to grow EPS by 121% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

This is in contrast to the rest of the market, which is expected to grow by 15% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we find it odd that Equatorial Pará Distribuidora de Energia is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Equatorial Pará Distribuidora de Energia revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. 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.

It is also worth noting that we have found 3 warning signs for Equatorial Pará Distribuidora de Energia (1 doesn't sit too well with us!) that you need to take into consideration.

If you're unsure about the strength of Equatorial Pará Distribuidora de Energia's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.