Aguas Andinas S.A. (SNSE:AGUAS-A) Investors Are Less Pessimistic Than Expected

With a price-to-earnings (or "P/E") ratio of 13.4x Aguas Andinas S.A. (SNSE:AGUAS-A) may be sending very bearish signals at the moment, given that almost half of all companies in Chile have P/E ratios under 8x and even P/E's lower than 5x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Aguas Andinas certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

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Does Growth Match The High P/E?

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

Retrospectively, the last year delivered an exceptional 69% gain to the company's bottom line. EPS has also lifted 11% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 9.9% as estimated by the three analysts watching the company. With the market predicted to deliver 17% growth , the company is positioned for a weaker earnings result.

In light of this, it's alarming that Aguas Andinas' P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. 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 Key Takeaway

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 Aguas Andinas currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 2 warning signs for Aguas Andinas you should be aware of, and 1 of them can't be ignored.

If these risks are making you reconsider your opinion on Aguas Andinas, 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.