Potential Upside For PagSeguro Digital Ltd. (NYSE:PAGS) Not Without Risk

PagSeguro Digital Ltd.'s (NYSE:PAGS) price-to-earnings (or "P/E") ratio of 13.8x might make it look like a buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 18x and even P/E's above 33x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, PagSeguro Digital has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See 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?

The only time you'd be truly comfortable seeing a P/E as low as PagSeguro Digital's is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a terrific increase of 18%. The strong recent performance means it was also able to grow EPS by 51% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 13% per year during the coming three years according to the twelve analysts following the company. With the market only predicted to deliver 10% each year, the company is positioned for a stronger earnings result.

In light of this, it's peculiar that PagSeguro Digital's P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Bottom Line On PagSeguro Digital's P/E

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 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.

We don't want to rain on the parade too much, but we did also find 1 warning sign for PagSeguro Digital that you need to be mindful of.

You might be able to find a better investment than PagSeguro Digital. 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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.