Shares of Sociedad Química y Minera de Chile SA (NYSE:SQM) are lagging the market, but so is the company

Sociedad Química y Minera de Chile SAs (NYSE:SQM) price-to-earnings (or “P/E”) ratio of 6.5x could make it look like a strong buy right now compared to the U.S. market, where about half of companies have a P/E has a profit. E-ratios above 17x and even price-to-earnings ratios above 32x are quite common. Although it is not wise to take the price-to-earnings ratio at face value as there may be an explanation as to why it is so limited.

With earnings declining more than the market lately, Sociedad Química y Minera de Chile has been very sluggish. It appears many expect the dismal earnings performance to continue, suppressing the price-to-earnings ratio. You would much rather the company not make a profit if you still believe in the company. If not, existing shareholders will likely struggle to get excited about the future direction of the stock price.

Check out our latest analysis for Sociedad Química y Minera de Chile

Want to know how analysts think the future of Sociedad Química y Minera de Chile compares to the industry? In that case our free report is a good starting point.

Does the growth correspond to the low price-earnings ratio?

The only time you’ll really feel comfortable with a price-to-earnings ratio as low as Sociedad Química y Minera de Chile’s is when the company’s growth is on track to clearly lag the market.

Looking at the past year’s earnings figures, the company’s profits have dishearteningly fallen to 48%. However, a few very strong years prior to that means the company was still able to grow earnings per share by an impressive 1,027% in total over the last three years. While it’s been a bumpy ride, we can still say that earnings growth has been more than adequate for the company lately.

Looking ahead now, earnings per share are expected to grow 7.1% per year over the next three years, according to the analysts who follow the company. That appears to be significantly lower than the 11% annual growth forecast for the broader market.

In light of this, it’s understandable that Sociedad Química y Minera de Chile’s price-to-earnings ratio is lower than most other companies. It seems that most investors expect limited future growth and are only willing to pay a lower amount for the stock.

The price-earnings ratio result of Sociedad Química y Minera de Chile

In our view, the price-to-earnings ratio is not primarily a valuation tool, but rather intended to gauge current investor sentiment and future expectations.

As we suspected, our review of Sociedad Química y Minera de Chile’s analyst forecasts found that its lower earnings outlook is contributing to its low price-to-earnings ratio. At this point, shareholders accept the low price/earnings because they admit that future earnings are unlikely to bring any pleasant surprises. It’s hard to see the share price rising significantly in the near future under these conditions.

Moreover, you should also learn more about this 2 warning signs we’ve spotted with Sociedad Química y Minera de Chile (including 1 that we don’t like very much).

If price-earnings ratios interest youyou might want to see this free collection of other companies with strong earnings growth and low price/earnings ratios.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. We aim to provide you with targeted, long-term analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no positions in the stocks mentioned.