Unpleasant Surprises Could Be In Store For Parque Arauco S.A.'s (SNSE:PARAUCO) Shares

Parque Arauco S.A.'s (SNSE:PARAUCO) price-to-earnings (or "P/E") ratio of 21.2x 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 12x and even P/E's below 8x are quite common. 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.

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Recent times have been advantageous for Parque Arauco as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Parque Arauco

Want the full picture on analyst estimates for the company? Then our free report on Parque Arauco will help you uncover what's on the horizon.

How Is Parque Arauco's Growth Trending?

In order to justify its P/E ratio, Parque Arauco would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 17%. The latest three year period has also seen an excellent 58% overall rise in EPS, aided 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.

Turning to the outlook, the next year should generate growth of 1.1% as estimated by the nine analysts watching the company. With the market predicted to deliver 11% growth , the company is positioned for a weaker earnings result.

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 are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Parque Arauco's analyst forecasts revealed that its inferior earnings outlook 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 aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware Parque Arauco is showing 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable.

Of course, you might also be able to find a better stock than Parque Arauco. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.