Benign Growth For Neoenergia S.A. (BVMF:NEOE3) Underpins Its Share Price

When close to half the companies in Brazil have price-to-earnings ratios (or "P/E's") above 11x, you may consider Neoenergia S.A. (BVMF:NEOE3) as an attractive investment with its 5.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Neoenergia could be doing better as it's been growing earnings less than most other companies lately. The P/E is probably low because investors think this lacklustre earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for Neoenergia

Want the full picture on analyst estimates for the company? Then our free report on Neoenergia will help you uncover what's on the horizon.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Neoenergia would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. Regardless, EPS has managed to lift by a handy 17% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 1.5% per annum as estimated by the nine analysts watching the company. Meanwhile, the broader market is forecast to expand by 17% per year, which paints a poor picture.

In light of this, it's understandable that Neoenergia's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

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.

We've established that Neoenergia maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 2 warning signs for Neoenergia (1 is potentially serious!) that we have uncovered.

If these risks are making you reconsider your opinion on Neoenergia, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.