Not Many Are Piling Into Compañía Electro Metalúrgica S.A. (SNSE:ELECMETAL) Stock Yet As It Plummets 30%

To the annoyance of some shareholders, Compañía Electro Metalúrgica S.A. (SNSE:ELECMETAL) shares are down a considerable 30% in the last month, which continues a horrid run for the company. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 40% in that time.

Even after such a large drop in price, Compañía Electro Metalúrgica's price-to-earnings (or "P/E") ratio of 6.5x might still make it look like a buy right now compared to the market in Chile, where around half of the companies have P/E ratios above 9x and even P/E's above 15x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Compañía Electro Metalúrgica has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. 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.

See our latest analysis for Compañía Electro Metalúrgica

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Compañía Electro Metalúrgica will help you shine a light on its historical performance.

Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Compañía Electro Metalúrgica's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 15%. The latest three year period has also seen an excellent 117% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Comparing that to the market, which is only predicted to deliver 14% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

With this information, we find it odd that Compañía Electro Metalúrgica is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.

What We Can Learn From Compañía Electro Metalúrgica's P/E?

Compañía Electro Metalúrgica's recently weak share price has pulled its P/E below most other companies. 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 Compañía Electro Metalúrgica currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Plus, you should also learn about these 4 warning signs we've spotted with Compañía Electro Metalúrgica (including 2 which make us uncomfortable).

You might be able to find a better investment than Compañía Electro Metalúrgica. 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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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.