Companhia de Saneamento Básico do Estado de São Paulo - SABESP's (BVMF:SBSP3) Shares May Have Run Too Fast Too Soon

With a median price-to-earnings (or "P/E") ratio of close to 9x in Brazil, you could be forgiven for feeling indifferent about Companhia de Saneamento Básico do Estado de São Paulo - SABESP's (BVMF:SBSP3) P/E ratio of 7.4x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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Recent times have been advantageous for Companhia de Saneamento Básico do Estado de São Paulo - SABESP as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. 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 not quite in favour.

View our latest analysis for Companhia de Saneamento Básico do Estado de São Paulo - SABESP

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Companhia de Saneamento Básico do Estado de São Paulo - SABESP.

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Companhia de Saneamento Básico do Estado de São Paulo - SABESP's is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a terrific increase of 184%. The strong recent performance means it was also able to grow EPS by 268% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 7.1% per annum as estimated by the twelve analysts watching the company. With the market predicted to deliver 20% growth per year, that's a disappointing outcome.

With this information, we find it concerning that Companhia de Saneamento Básico do Estado de São Paulo - SABESP is trading at a fairly similar P/E to the market. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.

The Key Takeaway

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.

Our examination of Companhia de Saneamento Básico do Estado de São Paulo - SABESP's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its P/E as much as we would have predicted. When we see a poor outlook with earnings heading backwards, we suspect share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Companhia de Saneamento Básico do Estado de São Paulo - SABESP (1 doesn't sit too well with us) you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.