Consolidated Operations Group Limited's (ASX:COG) Business Is Trailing The Market But Its Shares Aren't

With a price-to-earnings (or "P/E") ratio of 21.7x Consolidated Operations Group Limited (ASX:COG) may be sending bearish signals at the moment, given that almost half of all companies in Australia have P/E ratios under 16x and even P/E's lower than 9x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

For example, consider that Consolidated Operations Group's financial performance has been poor lately as it's earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Consolidated Operations Group

Where Does Consolidated Operations Group's P/E Sit Within Its Industry?

An inspection of average P/E's throughout Consolidated Operations Group's industry may help to explain its high P/E ratio. It turns out the Capital Markets industry in general has a P/E ratio similar to the market, as the graphic below shows. So unfortunately this doesn't provide a lot to explain the company's ratio right now. In the context of the Capital Markets industry's current setting, most of its constituents' P/E's would be expected to be held back. Still, the strength of the company's earnings will most likely determine where its P/E shall sit.

Although there are no analyst estimates available for Consolidated Operations Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

Consolidated Operations Group's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 24%. The last three years don't look nice either as the company has shrunk EPS by 87% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 1.3% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Consolidated Operations Group's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Final Word

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.

Our examination of Consolidated Operations Group revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 5 warning signs for Consolidated Operations Group (of which 2 are significant!) you should know about.

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 P/E ratio below 20x).

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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. 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.
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