Transmissora Aliança de Energia Elétrica S.A.'s (BVMF:TAEE11) P/E Is On The Mark

Transmissora Aliança de Energia Elétrica S.A.'s (BVMF:TAEE11) price-to-earnings (or "P/E") ratio of 13.7x might make it look like a sell right now compared to the market in Brazil, where around half of the companies have P/E ratios below 10x and even P/E's below 7x 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 as high as it is.

Transmissora Aliança de Energia Elétrica 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.

Check out our latest analysis for Transmissora Aliança de Energia Elétrica

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Transmissora Aliança de Energia Elétrica.

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

There's an inherent assumption that a company should outperform the market for P/E ratios like Transmissora Aliança de Energia Elétrica's to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 51%. The last three years don't look nice either as the company has shrunk EPS by 49% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next year should generate growth of 36% as estimated by the seven analysts watching the company. That's shaping up to be materially higher than the 23% growth forecast for the broader market.

In light of this, it's understandable that Transmissora Aliança de Energia Elétrica's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

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.

As we suspected, our examination of Transmissora Aliança de Energia Elétrica'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. It's hard to see the share price falling strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Transmissora Aliança de Energia Elétrica (2 make us uncomfortable!) that you need to be mindful of.

If you're unsure about the strength of Transmissora Aliança de Energia Elétrica's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.