Millicom International Cellular S.A.'s (NASDAQ:TIGO) Earnings Haven't Escaped The Attention Of Investors

With a price-to-earnings (or "P/E") ratio of 52.7x Millicom International Cellular S.A. (NASDAQ:TIGO) may be sending very bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 14x and even P/E's lower than 7x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

While the market has experienced earnings growth lately, Millicom International Cellular's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Is There Enough Growth For Millicom International Cellular?

In order to justify its P/E ratio, Millicom International Cellular would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 92% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 59% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 71% each year over the next three years. That's shaping up to be materially higher than the 9.8% per annum growth forecast for the broader market.

With this information, we can see why Millicom International Cellular is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Millicom International Cellular'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.

As we suspected, our examination of Millicom International Cellular's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

It is also worth noting that we have found 3 warning signs for Millicom International Cellular (2 make us uncomfortable!) that you need to take into consideration.

If you're unsure about the strength of Millicom International Cellular'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.