Unfortunately for some shareholders, the Sociedad Química y Minera de Chile (NYSE:SQM) share price has dived 30% in the last thirty days. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 47% drop over twelve months.
Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). The implication here is that long term investors have an opportunity when expectations of a company are too low. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
How Does Sociedad Química y Minera de Chile's P/E Ratio Compare To Its Peers?
Sociedad Química y Minera de Chile's P/E of 20.64 indicates some degree of optimism towards the stock. As you can see below, Sociedad Química y Minera de Chile has a higher P/E than the average company (16.0) in the chemicals industry.
Sociedad Química y Minera de Chile's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Sociedad Química y Minera de Chile saw earnings per share decrease by 37% last year. But over the longer term (5 years) earnings per share have increased by 3.3%.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
How Does Sociedad Química y Minera de Chile's Debt Impact Its P/E Ratio?
Net debt totals 12% of Sociedad Química y Minera de Chile's market cap. That's enough debt to impact the P/E ratio a little; so keep it in mind if you're comparing it to companies without debt.
The Verdict On Sociedad Química y Minera de Chile's P/E Ratio
Sociedad Química y Minera de Chile's P/E is 20.6 which is above average (13.3) in its market. With modest debt but no EPS growth in the last year, it's fair to say the P/E implies some optimism about future earnings, from the market. Given Sociedad Química y Minera de Chile's P/E ratio has declined from 29.6 to 20.6 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.
Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
Of course you might be able to find a better stock than Sociedad Química y Minera de Chile. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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