With a price-to-earnings (or "P/E") ratio of 2.9x JH Educational Technology INC. (HKG:1935) may be sending very bullish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios greater than 10x and even P/E's higher than 19x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
Earnings have risen at a steady rate over the last year for JH Educational Technology, which is generally not a bad outcome. One possibility is that the P/E is low because investors think this good 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.
View our latest analysis for JH Educational Technology
What Are Growth Metrics Telling Us About The Low P/E?
In order to justify its P/E ratio, JH Educational Technology would need to produce anemic growth that's substantially trailing the market.
If we review the last year of earnings growth, the company posted a worthy increase of 5.9%. Pleasingly, EPS has also lifted 46% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
This is in contrast to the rest of the market, which is expected to grow by 21% over the next year, materially higher than the company's recent medium-term annualised growth rates.
In light of this, it's understandable that JH Educational Technology's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.
The Final Word
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 JH Educational Technology 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. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.
Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for JH Educational Technology with six simple checks will allow you to discover any risks that could be an issue.
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 low P/E.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com