It's not a stretch to say that China Education Group Holdings Limited's (HKG:839) price-to-earnings (or "P/E") ratio of 7.1x right now seems quite "middle-of-the-road" compared to the market in Hong Kong, where the median P/E ratio is around 9x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
China Education Group Holdings could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.
Is There Some Growth For China Education Group Holdings?
The only time you'd be comfortable seeing a P/E like China Education Group Holdings' is when the company's growth is tracking the market closely.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 28%. Even so, admirably EPS has lifted 73% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
Turning to the outlook, the next three years should generate growth of 23% per annum as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 16% each year, which is noticeably less attractive.
In light of this, it's curious that China Education Group Holdings' P/E sits in line with the majority of other companies. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.
The Final Word
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
Our examination of China Education Group Holdings' analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.
Plus, you should also learn about these 3 warning signs we've spotted with China Education Group Holdings.
If these risks are making you reconsider your opinion on China Education Group 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.