Enel Generación Chile S.A. (SNSE:ENELGXCH) Could Be Riskier Than It Looks

With a price-to-earnings (or "P/E") ratio of 7.6x Enel Generación Chile S.A. (SNSE:ENELGXCH) may be sending bullish signals at the moment, given that almost half of all companies in Chile have P/E ratios greater than 11x and even P/E's higher than 16x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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Enel Generación Chile has been doing a decent job lately as it's been growing earnings at a reasonable pace. It might be that many expect the respectable earnings performance to degrade, which has repressed the P/E. If that doesn't eventuate, then existing shareholders may have reason to be optimistic about the future direction of the share price.

Check out our latest analysis for Enel Generación Chile

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Enel Generación Chile will help you shine a light on its historical performance.

What Are Growth Metrics Telling Us About The Low P/E?

Enel Generación Chile's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings growth, the company posted a worthy increase of 5.3%. Pleasingly, EPS has also lifted 200% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 9.7% shows it's noticeably more attractive on an annualised basis.

In light of this, it's peculiar that Enel Generación Chile's P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Bottom Line On Enel Generación Chile's P/E

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 Enel Generación Chile revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Enel Generación Chile that you need to be mindful of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.