China Gingko Education Group Company Limited's (HKG:1851) price-to-earnings (or "P/E") ratio of 2.1x might make it look like a strong buy right now compared to the market in Hong Kong, where around half of the companies have P/E ratios above 10x and even P/E's above 20x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
With earnings growth that's exceedingly strong of late, China Gingko Education Group has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
View our latest analysis for China Gingko Education Group
How Is China Gingko Education Group's Growth Trending?
There's an inherent assumption that a company should far underperform the market for P/E ratios like China Gingko Education Group's to be considered reasonable.
Retrospectively, the last year delivered an exceptional 49% gain to the company's bottom line. The latest three year period has also seen an excellent 812% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.
Comparing that to the market, which is only predicted to deliver 21% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.
With this information, we find it odd that China Gingko Education Group is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.
The Final Word
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.
Our examination of China Gingko Education Group revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.
It is also worth noting that we have found 2 warning signs for China Gingko Education Group that you need to take into consideration.
Of course, you might also be able to find a better stock than China Gingko Education Group. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.