Companhia de Saneamento Básico do Estado de São Paulo - SABESP's (BVMF:SBSP3) Share Price Not Quite Adding Up

With a price-to-earnings (or "P/E") ratio of 14.8x Companhia de Saneamento Básico do Estado de São Paulo - SABESP (BVMF:SBSP3) may be sending very bearish signals at the moment, given that almost half of all companies in Brazil have P/E ratios under 9x and even P/E's lower than 6x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Companhia de Saneamento Básico do Estado de São Paulo - SABESP has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Is There Enough Growth For Companhia de Saneamento Básico do Estado de São Paulo - SABESP?

The only time you'd be truly comfortable seeing a P/E as steep as Companhia de Saneamento Básico do Estado de São Paulo - SABESP's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 26% gain to the company's bottom line. The latest three year period has also seen an excellent 61% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 13% per annum during the coming three years according to the eleven analysts following the company. That's shaping up to be materially lower than the 17% each year growth forecast for the broader market.

With this information, we find it concerning that Companhia de Saneamento Básico do Estado de São Paulo - SABESP is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Companhia de Saneamento Básico do Estado de São Paulo - SABESP's P/E?

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 Companhia de Saneamento Básico do Estado de São Paulo - SABESP currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It is also worth noting that we have found 1 warning sign for Companhia de Saneamento Básico do Estado de São Paulo - SABESP that you need to take into consideration.

If these risks are making you reconsider your opinion on Companhia de Saneamento Básico do Estado de São Paulo - SABESP, 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.