Enel Generación Chile S.A. (SNSE:ENELGXCH) Looks Just Right

Enel Generación Chile S.A.'s (SNSE:ENELGXCH) price-to-earnings (or "P/E") ratio of 12.3x 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 6x and even P/E's below 3x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

While the market has experienced earnings growth lately, Enel Generación Chile's 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Enel Generación Chile

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

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

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

Retrospectively, the last year delivered a frustrating 70% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 54% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 60% per year as estimated by the lone analyst watching the company. Meanwhile, the rest of the market is forecast to only expand by 0.6% per annum, which is noticeably less attractive.

With this information, we can see why Enel Generación Chile is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Enel Generación Chile's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

You need to take note of risks, for example - Enel Generación Chile has 4 warning signs (and 1 which shouldn't be ignored) we think you should know about.

You might be able to find a better investment than Enel Generación Chile. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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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.