Getting In Cheap On Companhia de Saneamento Básico do Estado de São Paulo - SABESP (BVMF:SBSP3) Might Be Difficult

With a price-to-earnings (or "P/E") ratio of 17.3x Companhia de Saneamento Básico do Estado de São Paulo - SABESP (BVMF:SBSP3) may be sending bearish signals at the moment, given that almost half of all companies in Brazil have P/E ratios under 11x and even P/E's lower than 7x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Companhia de Saneamento Básico do Estado de São Paulo - SABESP hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See 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.

What Are Growth Metrics Telling Us About The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Companhia de Saneamento Básico do Estado de São Paulo - SABESP's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 2.2%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 149% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Looking ahead now, EPS is anticipated to climb by 38% during the coming year according to the twelve analysts following the company. That's shaping up to be materially higher than the 21% growth forecast for the broader market.

With this information, we can see why Companhia de Saneamento Básico do Estado de São Paulo - SABESP is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

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.

As we suspected, our examination of Companhia de Saneamento Básico do Estado de São Paulo - SABESP's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Companhia de Saneamento Básico do Estado de São Paulo - SABESP you should know about.

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.