Scholar Education Group (HKG:1769) shareholders would be excited to see that the share price has had a great month, posting a 32% gain and recovering from prior weakness. This latest share price bounce rounds out a remarkable 349% gain over the last twelve months.
Following the firm bounce in price, Scholar Education Group may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 34.3x, since almost half of all companies in Hong Kong have P/E ratios under 8x and even P/E's lower than 5x 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 so lofty.
With earnings growth that's exceedingly strong of late, Scholar Education Group has been doing very well. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
See our latest analysis for Scholar Education Group
Does Growth Match The High P/E?
Scholar Education Group's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 59% last year. Pleasingly, EPS has also lifted 73% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Comparing that to the market, which is predicted to deliver 18% growth in the next 12 months, the company's momentum is pretty similar based on recent medium-term annualised earnings results.
In light of this, it's curious that Scholar Education Group's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average recent growth rates and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as a continuation of recent earnings trends would weigh down the share price eventually.
The Key Takeaway
Scholar Education Group's P/E is flying high just like its stock has during the last month. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
We've established that Scholar Education Group currently trades on a higher than expected P/E since its recent three-year growth is only in line with the wider market forecast. When we see average earnings with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.
Plus, you should also learn about this 1 warning sign we've spotted with Scholar Education Group.
If you're unsure about the strength of Scholar Education Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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