Transmissora Aliança de Energia Elétrica S.A.'s (BVMF:TAEE11) Prospects Need A Boost To Lift Shares

With a price-to-earnings (or "P/E") ratio of 7.3x Transmissora Aliança de Energia Elétrica S.A. (BVMF:TAEE11) may be sending bullish signals at the moment, given that almost half of all companies in Brazil have P/E ratios greater than 10x and even P/E's higher than 14x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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Transmissora Aliança de Energia Elétrica certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View 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 underperform the market for P/E ratios like Transmissora Aliança de Energia Elétrica's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 16% gain to the company's bottom line. Still, incredibly EPS has fallen 14% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings growth is heading into negative territory, declining 3.9% per annum over the next three years. With the market predicted to deliver 16% growth per annum, that's a disappointing outcome.

With this information, we are not surprised that Transmissora Aliança de Energia Elétrica is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

What We Can Learn From Transmissora Aliança de Energia Elétrica's P/E?

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Transmissora Aliança de Energia Elétrica maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Transmissora Aliança de Energia Elétrica (1 shouldn't be ignored!) that you should be aware of before investing here.

You might be able to find a better investment than Transmissora Aliança de Energia Elétrica. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.