Optimistic Investors Push COG Financial Services Limited (ASX:COG) Shares Up 26% But Growth Is Lacking

Despite an already strong run, COG Financial Services Limited (ASX:COG) shares have been powering on, with a gain of 26% in the last thirty days. The annual gain comes to 129% following the latest surge, making investors sit up and take notice.

After such a large jump in price, given around half the companies in Australia have price-to-earnings ratios (or "P/E's") below 20x, you may consider COG Financial Services as a stock to potentially avoid with its 23.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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With earnings growth that's superior to most other companies of late, COG Financial Services has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out 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.

How Is COG Financial Services' Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 41%. However, this wasn't enough as the latest three year period has seen a very unpleasant 15% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 9.7% each year over the next three years. With the market predicted to deliver 17% growth per year, the company is positioned for a weaker earnings result.

In light of this, it's alarming that COG Financial Services' P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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.

The Key Takeaway

COG Financial Services' P/E is getting right up there since its shares have risen strongly. 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.

We've established that COG Financial Services 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. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider and we've discovered 3 warning signs for COG Financial Services (1 is significant!) that you should be aware of before investing here.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.