Sociedad Punta del Cobre S.A.'s (SNSE:PUCOBRE) 25% Price Boost Is Out Of Tune With Earnings

Sociedad Punta del Cobre S.A. (SNSE:PUCOBRE) shareholders have had their patience rewarded with a 25% share price jump in the last month. Looking further back, the 21% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

After such a large jump in price, Sociedad Punta del Cobre's price-to-earnings (or "P/E") ratio of 27.5x 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 9x and even P/E's below 6x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

For instance, Sociedad Punta del Cobre's receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, 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.

Check out our latest analysis for Sociedad Punta del Cobre

Although there are no analyst estimates available for Sociedad Punta del Cobre, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Sociedad Punta del Cobre's Growth Trending?

In order to justify its P/E ratio, Sociedad Punta del Cobre would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 52% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 63% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 13% shows it's an unpleasant look.

With this information, we find it concerning that Sociedad Punta del Cobre is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Bottom Line On Sociedad Punta del Cobre's P/E

Sociedad Punta del Cobre's P/E is flying high just like its stock has during the last month. 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.

Our examination of Sociedad Punta del Cobre revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Sociedad Punta del Cobre (of which 1 is potentially serious!) you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.