There's Reason For Concern Over Sociedad Punta del Cobre S.A.'s (SNSE:PUCOBRE) Massive 25% Price Jump

The Sociedad Punta del Cobre S.A. (SNSE:PUCOBRE) share price has done very well over the last month, posting an excellent gain of 25%. Looking further back, the 21% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Following the firm bounce in price, given close to half the companies in Chile have price-to-earnings ratios (or "P/E's") below 9x, you may consider Sociedad Punta del Cobre as a stock to avoid entirely with its 27.5x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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.

See 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.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 52%. The last three years don't look nice either as the company has shrunk EPS by 63% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 13% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's alarming that Sociedad Punta del Cobre's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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

The strong share price surge has got Sociedad Punta del Cobre's P/E rushing to great heights as well. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Sociedad Punta del Cobre currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. 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. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about these 2 warning signs we've spotted with Sociedad Punta del Cobre (including 1 which is concerning).

If these risks are making you reconsider your opinion on Sociedad Punta del Cobre, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.