Cosmos Insurance Company Public Ltd.'s (CSE:COS) Shares Climb 31% But Its Business Is Yet to Catch Up

Cosmos Insurance Company Public Ltd. (CSE:COS) shareholders would be excited to see that the share price has had a great month, posting a 31% gain and recovering from prior weakness. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Cosmos Insurance Company's P/E ratio of 6.3x, since the median price-to-earnings (or "P/E") ratio in Cyprus is also close to 6x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

With earnings growth that's exceedingly strong of late, Cosmos Insurance Company has been doing very well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for Cosmos Insurance Company

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Cosmos Insurance Company will help you shine a light on its historical performance.

Is There Some Growth For Cosmos Insurance Company?

In order to justify its P/E ratio, Cosmos Insurance Company would need to produce growth that's similar to the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 41% last year. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

This is in contrast to the rest of the market, which is expected to grow by 25% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's curious that Cosmos Insurance Company's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Bottom Line On Cosmos Insurance Company's P/E

Cosmos Insurance Company's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Cosmos Insurance Company currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are uncomfortable with the P/E as this earnings performance isn't likely to support a more positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you take the next step, you should know about the 2 warning signs for Cosmos Insurance Company that we have uncovered.

Of course, you might also be able to find a better stock than Cosmos Insurance Company. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.