With a price-to-earnings (or "P/E") ratio of 13.6x Consolidated Water Co. Ltd. (NASDAQ:CWCO) 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 19x and even P/E's higher than 34x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
Consolidated Water certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. 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 you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
NasdaqGS:CWCO Price to Earnings Ratio vs Industry July 17th 2024 If you'd like to see what analysts are forecasting going forward, you should check out our free report on Consolidated Water.
How Is Consolidated Water's Growth Trending?
In order to justify its P/E ratio, Consolidated Water would need to produce sluggish growth that's trailing the market.
If we review the last year of earnings growth, the company posted a terrific increase of 229%. Pleasingly, EPS has also lifted 379% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 39% as estimated by the two analysts watching the company. Meanwhile, the broader market is forecast to expand by 12%, which paints a poor picture.
In light of this, it's understandable that Consolidated Water's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
The Final Word
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
We've established that Consolidated Water maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.
You should always think about risks. Case in point, we've spotted 3 warning signs for Consolidated Water you should be aware of, and 2 of them can't be ignored.
You might be able to find a better investment than Consolidated Water. 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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