When close to half the companies in Chile have price-to-earnings ratios (or “P/E’s”) below 9x, you may consider Cencosud Shopping S.A. (SNSE:CENCOMALLS) as a stock to potentially avoid with its 11.4x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it’s justified.

Recent times have been pleasing for Cencosud Shopping as its earnings have risen in spite of the market’s earnings going into reverse. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.

View our latest analysis for Cencosud Shopping

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Is There Enough Growth For Cencosud Shopping?

In order to justify its P/E ratio, Cencosud Shopping would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 11% last year. Ultimately though, it couldn’t turn around the poor performance of the prior period, with EPS shrinking 12% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 2.7% each year as estimated by the six analysts watching the company. With the market predicted to deliver 17% growth per year, the company is positioned for a weaker earnings result.

With this information, we find it concerning that Cencosud Shopping is trading at a P/E higher than the market. 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.

What We Can Learn From Cencosud Shopping’s P/E?

Typically, we’d caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We’ve established that Cencosud Shopping 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.

Having said that, be aware Cencosud Shopping is showing 2 warning signs in our investment analysis, you should know about.

If you’re unsure about the strength of Cencosud Shopping’s business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.