Investors Interested In Cencosud S.A.'s (SNSE:CENCOSUD) Earnings

Cencosud S.A.'s (SNSE:CENCOSUD) price-to-earnings (or "P/E") ratio of 30.8x might make it look like a strong sell right now compared to the market in Chile, where around half of the companies have P/E ratios below 10x and even P/E's below 7x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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Cencosud certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Cencosud

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Is There Enough Growth For Cencosud?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Cencosud's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 114% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 46% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 33% each year during the coming three years according to the eight analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 5.8% per annum, which is noticeably less attractive.

With this information, we can see why Cencosud 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 Key Takeaway

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.

As we suspected, our examination of Cencosud's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

You always need to take note of risks, for example - Cencosud has 1 warning sign we think you should be aware of.

If you're unsure about the strength of Cencosud'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.