There's No Escaping Companhia de Saneamento do Paraná - SANEPAR's (BVMF:SAPR11) Muted Earnings

Companhia de Saneamento do Paraná - SANEPAR's (BVMF:SAPR11) price-to-earnings (or "P/E") ratio of 5.5x might make it look like a buy right now compared to the market in Brazil, where around half of the companies have P/E ratios above 10x and even P/E's above 17x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

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Companhia de Saneamento do Paraná - SANEPAR certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.

View our latest analysis for Companhia de Saneamento do Paraná - SANEPAR

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How Is Companhia de Saneamento do Paraná - SANEPAR's Growth Trending?

In order to justify its P/E ratio, Companhia de Saneamento do Paraná - SANEPAR would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings growth, the company posted a terrific increase of 42%. Pleasingly, EPS has also lifted 88% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings growth is heading into negative territory, declining 38% over the next year. With the market predicted to deliver 22% growth , that's a disappointing outcome.

With this information, we are not surprised that Companhia de Saneamento do Paraná - SANEPAR is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Companhia de Saneamento do Paraná - SANEPAR 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 Companhia de Saneamento do Paraná - SANEPAR (1 is a bit concerning!) that we have uncovered.

If these risks are making you reconsider your opinion on Companhia de Saneamento do Paraná - SANEPAR, 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.