COG Financial Services Limited's (ASX:COG) 34% Jump Shows Its Popularity With Investors

COG Financial Services Limited (ASX:COG) shareholders would be excited to see that the share price has had a great month, posting a 34% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 16% over that time.

Following the firm bounce in price, COG Financial Services' price-to-earnings (or "P/E") ratio of 19.3x might make it look like a sell right now compared to the market in Australia, where around half of the companies have P/E ratios below 16x and even P/E's below 9x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

COG Financial Services certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for COG Financial Services

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

Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like COG Financial Services' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 34% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 20% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 24% per annum during the coming three years according to the three analysts following the company. With the market only predicted to deliver 15% per year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that COG Financial Services' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

The large bounce in COG Financial Services' shares has lifted the company's P/E to a fairly high level. 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 COG Financial Services' 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. Unless these conditions change, they will continue to provide strong support to the share price.

Before you settle on your opinion, we've discovered 3 warning signs for COG Financial Services (1 shouldn't be ignored!) that you should be aware of.

If you're unsure about the strength of COG Financial Services' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.