Investors Aren't Buying Cosmo Lady (China) Holdings Company Limited's (HKG:2298) Earnings

With a price-to-earnings (or "P/E") ratio of 6.1x Cosmo Lady (China) Holdings Company Limited (HKG:2298) may be sending very bullish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios greater than 13x and even P/E's higher than 24x are not unusual. 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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Earnings have risen at a steady rate over the last year for Cosmo Lady (China) Holdings, which is generally not a bad outcome. It might be that many expect the respectable earnings performance to degrade, which has repressed the P/E. If that doesn't eventuate, then existing shareholders may have reason to be optimistic about the future direction of the share price.

View our latest analysis for Cosmo Lady (China) Holdings

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Cosmo Lady (China) Holdings' earnings, revenue and cash flow.

How Is Cosmo Lady (China) Holdings' Growth Trending?

In order to justify its P/E ratio, Cosmo Lady (China) Holdings would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered a decent 2.8% gain to the company's bottom line. Although, the latest three year period in total hasn't been as good as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 21% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Cosmo Lady (China) Holdings' P/E sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Final Word

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 Cosmo Lady (China) Holdings maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term 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 1 warning sign we think you should be aware of.

If these risks are making you reconsider your opinion on Cosmo Lady (China) Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.