Improved Earnings Required Before Shanghai Action Education Technology CO.,LTD. (SHSE:605098) Shares Find Their Feet

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 38x, you may consider Shanghai Action Education Technology CO.,LTD. (SHSE:605098) as a highly attractive investment with its 18.5x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

Recent times have been advantageous for Shanghai Action Education TechnologyLTD as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Shanghai Action Education TechnologyLTD

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shanghai Action Education TechnologyLTD.

How Is Shanghai Action Education TechnologyLTD's Growth Trending?

Shanghai Action Education TechnologyLTD'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.

Retrospectively, the last year delivered an exceptional 43% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 35% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 19% as estimated by the five analysts watching the company. That's shaping up to be materially lower than the 36% growth forecast for the broader market.

In light of this, it's understandable that Shanghai Action Education TechnologyLTD's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

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.

As we suspected, our examination of Shanghai Action Education TechnologyLTD's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Shanghai Action Education TechnologyLTD, and understanding should be part of your investment process.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.