Unpleasant Surprises Could Be In Store For Cohort plc's (LON:CHRT) Shares

With a price-to-earnings (or "P/E") ratio of 26x Cohort plc (LON:CHRT) may be sending very bearish signals at the moment, given that almost half of all companies in the United Kingdom have P/E ratios under 15x and even P/E's lower than 9x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Cohort certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Cohort

Want the full picture on analyst estimates for the company? Then our free report on Cohort will help you uncover what's on the horizon.

Is There Enough Growth For Cohort?

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

Retrospectively, the last year delivered an exceptional 47% gain to the company's bottom line. The latest three year period has also seen an excellent 278% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 0.9% per annum during the coming three years according to the three analysts following the company. With the market predicted to deliver 14% growth per annum, the company is positioned for a weaker earnings result.

With this information, we find it concerning that Cohort is trading at a P/E higher than the market. 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

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

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Cohort's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. 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.

You should always think about risks. Case in point, we've spotted 2 warning signs for Cohort you should be aware of, and 1 of them is concerning.

You might be able to find a better investment than Cohort. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.