When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 10x, you may consider China Beststudy Education Group (HKG:3978) as a stock to avoid entirely with its 21x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

China Beststudy Education Group certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as China Beststudy Education Group's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 73% gain to the company's bottom line. The latest three year period has also seen an excellent 61% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 40% per annum over the next three years. That's shaping up to be materially higher than the 12% each year growth forecast for the broader market.

With this information, we can see why China Beststudy Education Group is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On China Beststudy Education Group's P/E

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.

We've established that China Beststudy Education Group maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for China Beststudy Education Group with six simple checks.

You might be able to find a better investment than China Beststudy Education Group. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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