Equatorial Pará Distribuidora de Energia S.A.'s (BVMF:EQPA3) Subdued P/E Might Signal An Opportunity

When close to half the companies in Brazil have price-to-earnings ratios (or "P/E's") above 10x, you may consider Equatorial Pará Distribuidora de Energia S.A. (BVMF:EQPA3) as an attractive investment with its 6.5x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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As an illustration, earnings have deteriorated at Equatorial Pará Distribuidora de Energia over the last year, which is not ideal at all. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. 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?

Equatorial Pará Distribuidora de Energia's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered a frustrating 13% 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 59% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

It's interesting to note that the rest of the market is similarly expected to grow by 16% over the next year, which is fairly even with 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. It may be that most investors are not convinced the company can maintain recent growth rates.

The Key Takeaway

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.

We've established that Equatorial Pará Distribuidora de Energia currently trades on a lower than expected P/E since its recent three-year growth is in line with the wider market forecast. There could be some unobserved threats to earnings preventing the P/E ratio from matching the company's performance. It appears some are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions should normally provide more support to the share price.

You should always think about risks. Case in point, we've spotted 3 warning signs for Equatorial Pará Distribuidora de Energia you should be aware of, and 1 of them makes us a bit uncomfortable.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.