With a price-to-earnings (or "P/E") ratio of 15x China Education Group Holdings Limited (HKG:839) may be sending bearish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios under 10x and even P/E's lower than 6x 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 as high as it is.

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China Education Group Holdings hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for China Education Group Holdings

If you'd like to see what analysts are forecasting going forward, you should check out our free report on China Education Group Holdings.

How Is China Education Group Holdings' Growth Trending?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 71%. The last three years don't look nice either as the company has shrunk EPS by 76% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 73% per annum over the next three years. That's shaping up to be materially higher than the 13% each year growth forecast for the broader market.

With this information, we can see why China Education Group Holdings is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

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 China Education Group Holdings 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. It's hard to see the share price falling strongly in the near future under these circumstances.

There are also other vital risk factors to consider and we've discovered 3 warning signs for China Education Group Holdings (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

Of course, you might also be able to find a better stock than China Education Group Holdings. 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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