Improved Earnings Required Before COSOL Limited (ASX:COS) Stock's 25% Jump Looks Justified

COSOL Limited (ASX:COS) shareholders are no doubt pleased to see that the share price has bounced 25% in the last month, although it is still struggling to make up recently lost ground. But the last month did very little to improve the 51% share price decline over the last year.

Even after such a large jump in price, given about half the companies in Australia have price-to-earnings ratios (or "P/E's") above 19x, you may still consider COSOL as an attractive investment with its 12.1x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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COSOL could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for COSOL

If you'd like to see what analysts are forecasting going forward, you should check out our free report on COSOL.

How Is COSOL's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as COSOL's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered a frustrating 6.2% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 38% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Looking ahead now, EPS is anticipated to climb by 10% per year during the coming three years according to the two analysts following the company. With the market predicted to deliver 15% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's understandable that COSOL's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

The latest share price surge wasn't enough to lift COSOL's P/E close to the market median. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of COSOL's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

It is also worth noting that we have found 2 warning signs for COSOL that you need to take into consideration.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.