Engie Brasil Energia S.A. (BVMF:EGIE3) Could Be Riskier Than It Looks

Simply Wall St · 10/18 17:35

There wouldn't be many who think Engie Brasil Energia S.A.'s (BVMF:EGIE3) price-to-earnings (or "P/E") ratio of 7.7x is worth a mention when the median P/E in Brazil is similar at about 10x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

While the market has experienced earnings growth lately, Engie Brasil Energia's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

See our latest analysis for Engie Brasil Energia

pe-multiple-vs-industry
BOVESPA:EGIE3 Price to Earnings Ratio vs Industry October 18th 2024
Want the full picture on analyst estimates for the company? Then our free report on Engie Brasil Energia will help you uncover what's on the horizon.

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

Engie Brasil Energia's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

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 40%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 85% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Turning to the outlook, the next three years should generate growth of 21% per year as estimated by the seven analysts watching the company. That's shaping up to be materially higher than the 16% per annum growth forecast for the broader market.

With this information, we find it interesting that Engie Brasil Energia is trading at a fairly similar P/E to the market. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Key Takeaway

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.

Our examination of Engie Brasil Energia's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Engie Brasil Energia (of which 3 are significant!) you should know about.

Of course, you might also be able to find a better stock than Engie Brasil Energia. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.