The Cowell e Holdings Inc. (HKG:1415) share price has fared very poorly over the last month, falling by a substantial 43%. To make matters worse, the recent drop has wiped out a year's worth of gains with the share price now back where it started a year ago.
Although its price has dipped substantially, given around half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 10x, you may still consider Cowell e Holdings as a stock to potentially avoid with its 15.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.
With earnings growth that's superior to most other companies of late, Cowell e Holdings has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.
See our latest analysis for Cowell e Holdings
How Is Cowell e Holdings' Growth Trending?
Cowell e Holdings' P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.
Retrospectively, the last year delivered an exceptional 152% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 131% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.
Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 42% per year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 14% per year, which is noticeably less attractive.
In light of this, it's understandable that Cowell e Holdings' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Bottom Line On Cowell e Holdings' P/E
Cowell e Holdings' P/E hasn't come down all the way after its stock plunged. 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 Cowell e Holdings maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.
You always need to take note of risks, for example - Cowell e Holdings has 2 warning signs we think you should be aware of.
Of course, you might also be able to find a better stock than Cowell e Holdings. 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.