China 21st Century Education Group Limited (HKG:1598) shareholders that were waiting for something to happen have been dealt a blow with a 32% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 37% in that time.
After such a large drop in price, given about half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 10x, you may consider China 21st Century Education Group as an attractive investment with its 5.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
China 21st Century Education Group certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.
How Is China 21st Century Education Group's Growth Trending?
There's an inherent assumption that a company should underperform the market for P/E ratios like China 21st Century Education Group's to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 46%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 46% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 54% over the next year. That's shaping up to be materially higher than the 21% growth forecast for the broader market.
With this information, we find it odd that China 21st Century Education Group is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.
The Final Word
China 21st Century Education Group's P/E has taken a tumble along with its share price. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that China 21st Century Education Group currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.
Plus, you should also learn about these 2 warning signs we've spotted with China 21st Century Education Group (including 1 which can't be ignored).
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.