Investors Holding Back On PagSeguro Digital Ltd. (NYSE:PAGS)

With a price-to-earnings (or "P/E") ratio of 11.4x PagSeguro Digital Ltd. (NYSE:PAGS) may be sending bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 17x and even P/E's higher than 32x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for PagSeguro Digital as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for PagSeguro Digital

If you'd like to see what analysts are forecasting going forward, you should check out our free report on PagSeguro Digital.

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

In order to justify its P/E ratio, PagSeguro Digital would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a decent 12% gain to the company's bottom line. Pleasingly, EPS has also lifted 33% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 15% each year as estimated by the eleven analysts watching the company. That's shaping up to be materially higher than the 11% per annum growth forecast for the broader market.

With this information, we find it odd that PagSeguro Digital is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Final Word

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.

We've established that PagSeguro Digital currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

Plus, you should also learn about this 1 warning sign we've spotted with PagSeguro Digital.

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.