China Xinhua Education Group Limited (HKG:2779) shareholders have had their patience rewarded with a 28% share price jump in the last month. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 32% over that time.

Even after such a large jump in price, China Xinhua Education Group may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 5.7x, since almost half of all companies in Hong Kong have P/E ratios greater than 9x and even P/E's higher than 20x 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 limited.

China Xinhua Education Group has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. 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.

See our latest analysis for China Xinhua Education Group

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

There's an inherent assumption that a company should underperform the market for P/E ratios like China Xinhua Education Group's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 9.0%. This was backed up an excellent period prior to see EPS up by 30% 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.

This is in contrast to the rest of the market, which is expected to grow by 16% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why China Xinhua Education Group is trading at a P/E lower than the market. 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 Bottom Line On China Xinhua Education Group's P/E

China Xinhua Education Group's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that China Xinhua Education Group 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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for China Xinhua Education Group that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.

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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.