Pinning Down Parque Arauco S.A.'s (SNSE:PARAUCO) P/E Is Difficult Right Now

With a price-to-earnings (or "P/E") ratio of 11.5x Parque Arauco S.A. (SNSE:PARAUCO) may be sending bearish signals at the moment, given that almost half of all companies in Chile have P/E ratios under 9x and even P/E's lower than 6x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Parque Arauco certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Parque Arauco

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Is There Enough Growth For Parque Arauco?

The only time you'd be truly comfortable seeing a P/E as high as Parque Arauco's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered an exceptional 52% gain to the company's bottom line. Still, EPS has barely risen at all from three years ago in total, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 2.9% each year as estimated by the eight analysts watching the company. That's not great when the rest of the market is expected to grow by 21% each year.

In light of this, it's alarming that Parque Arauco's P/E sits above the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

The Bottom Line On Parque Arauco's P/E

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.

Our examination of Parque Arauco's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Parque Arauco (2 are potentially serious!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on Parque Arauco, 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.