Improved Earnings Required Before Cosmo Lady (China) Holdings Company Limited (HKG:2298) Stock's 26% Jump Looks Justified

The Cosmo Lady (China) Holdings Company Limited (HKG:2298) share price has done very well over the last month, posting an excellent gain of 26%. Looking back a bit further, it's encouraging to see the stock is up 43% in the last year.

Even after such a large jump in price, given about half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 12x, you may still consider Cosmo Lady (China) Holdings as a highly attractive investment with its 4.7x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

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With earnings growth that's superior to most other companies of late, Cosmo Lady (China) Holdings has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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 out of favour.

View our latest analysis for Cosmo Lady (China) Holdings

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Cosmo Lady (China) Holdings.

What Are Growth Metrics Telling Us About The Low P/E?

Cosmo Lady (China) Holdings' P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 198% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 31% as estimated by the lone analyst watching the company. With the market predicted to deliver 19% growth , that's a disappointing outcome.

With this information, we are not surprised that Cosmo Lady (China) Holdings is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

Cosmo Lady (China) Holdings' recent share price jump still sees its P/E sitting firmly flat on the ground. 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 Cosmo Lady (China) Holdings' analyst forecasts revealed that its outlook for shrinking earnings 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You always need to take note of risks, for example - Cosmo Lady (China) Holdings has 2 warning signs we think you should be aware of.

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.