Some Shareholders Feeling Restless Over Transmissora Aliança de Energia Elétrica S.A.'s (BVMF:TAEE11) P/E Ratio

There wouldn't be many who think Transmissora Aliança de Energia Elétrica S.A.'s (BVMF:TAEE11) price-to-earnings (or "P/E") ratio of 7.2x is worth a mention when the median P/E in Brazil is similar at about 9x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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Recent times have been advantageous for Transmissora Aliança de Energia Elétrica as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

View our latest analysis for Transmissora Aliança de Energia Elétrica

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How Is Transmissora Aliança de Energia Elétrica's Growth Trending?

In order to justify its P/E ratio, Transmissora Aliança de Energia Elétrica would need to produce growth that's similar to the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 24% last year. Still, incredibly EPS has fallen 23% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 31% during the coming year according to the eight analysts following the company. With the market predicted to deliver 11% growth , that's a disappointing outcome.

In light of this, it's somewhat alarming that Transmissora Aliança de Energia Elétrica's P/E sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

The Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Transmissora Aliança de Energia Elétrica currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. Right now we are uncomfortable with the P/E as the predicted future earnings are unlikely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Transmissora Aliança de Energia Elétrica (1 shouldn't be ignored) you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.