Co-Diagnostics, Inc.'s (NASDAQ:CODX) Share Price Boosted 42% But Its Business Prospects Need A Lift Too

Co-Diagnostics, Inc. (NASDAQ:CODX) shareholders would be excited to see that the share price has had a great month, posting a 42% gain and recovering from prior weakness. But not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 35% in the last twelve months.

In spite of the firm bounce in price, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 18x, you may still consider Co-Diagnostics as a highly attractive investment with its 6.6x 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.

With earnings growth that's superior to most other companies of late, Co-Diagnostics 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Co-Diagnostics

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Co-Diagnostics.

How Is Co-Diagnostics' Growth Trending?

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

Retrospectively, the last year delivered an exceptional 226% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 22% per year as estimated by the three analysts watching the company. With the market predicted to deliver 12% growth each year, that's a disappointing outcome.

In light of this, it's understandable that Co-Diagnostics' P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

Shares in Co-Diagnostics are going to need a lot more upward momentum to get the company's P/E out of its slump. 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.

As we suspected, our examination of Co-Diagnostics' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 3 warning signs for Co-Diagnostics (1 is potentially serious!) that you need to take into consideration.

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

If you’re looking to trade Co-Diagnostics, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.