Despite an already strong run, China Gingko Education Group Company Limited (HKG:1851) shares have been powering on, with a gain of 38% in the last thirty days. Looking further back, the 25% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.
Although its price has surged higher, given about half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 11x, you may still consider China Gingko Education Group as a highly attractive investment with its 3.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
China Gingko Education Group has been doing a decent job lately as it's been growing earnings at a reasonable pace. 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 China Gingko Education Group
How Is China Gingko Education Group's Growth Trending?
China Gingko Education Group's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.
If we review the last year of earnings growth, the company posted a worthy increase of 3.5%. Pleasingly, EPS has also lifted 296% 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 17% over the next year, materially lower than the company's recent medium-term annualised growth rates.
With this information, we find it odd that China Gingko Education Group is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.
The Key Takeaway
China Gingko Education Group's recent share price jump still sees its P/E sitting firmly flat on the ground. 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 China Gingko Education Group currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. 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.
You always need to take note of risks, for example - China Gingko Education Group has 2 warning signs we think you should be aware of.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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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.