Shareholders Should Be Pleased With Aguas Andinas S.A.'s (SNSE:AGUAS-A) Price

When close to half the companies in Chile have price-to-earnings ratios (or "P/E's") below 10x, you may consider Aguas Andinas S.A. (SNSE:AGUAS-A) as a stock to avoid entirely with its 17.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Our free stock report includes 2 warning signs investors should be aware of before investing in Aguas Andinas. Read for free now.

While the market has experienced earnings growth lately, Aguas Andinas' earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for Aguas Andinas

Keen to find out how analysts think Aguas Andinas' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Aguas Andinas' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Aguas Andinas' is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 6.8% decrease to the company's bottom line. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 24% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 15% each year over the next three years. That's shaping up to be materially higher than the 8.8% per year growth forecast for the broader market.

With this information, we can see why Aguas Andinas is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Aguas Andinas' 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.

We've established that Aguas Andinas maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Aguas Andinas is showing 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.