Investors Don't See Light At End Of COSOL Limited's (ASX:COS) Tunnel And Push Stock Down 26%

The COSOL Limited (ASX:COS) share price has fared very poorly over the last month, falling by a substantial 26%. For any long-term shareholders, the last month ends a year to forget by locking in a 50% share price decline.

Since its price has dipped substantially, given about half the companies in Australia have price-to-earnings ratios (or "P/E's") above 22x, you may consider COSOL as a highly attractive investment with its 10.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

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COSOL hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See 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?

There's an inherent assumption that a company should far underperform the market for P/E ratios like COSOL's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 12% decrease to the company's bottom line. Regardless, EPS has managed to lift by a handy 8.2% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Looking ahead now, EPS is anticipated to climb by 2.3% per year during the coming three years according to the two analysts following the company. With the market predicted to deliver 18% growth each year, the company is positioned for a weaker earnings result.

With this information, we can see why COSOL is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From COSOL's P/E?

COSOL's P/E looks about as weak as its stock price lately. 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 COSOL's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. 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 1 warning sign for COSOL that you need to take into consideration.

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

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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.