Take Care Before Jumping Onto Shanghai Action Education Technology CO.,LTD. (SHSE:605098) Even Though It's 26% Cheaper

Unfortunately for some shareholders, the Shanghai Action Education Technology CO.,LTD. (SHSE:605098) share price has dived 26% in the last thirty days, prolonging recent pain. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 21% in that time.

Even after such a large drop in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 29x, you may still consider Shanghai Action Education TechnologyLTD as an attractive investment with its 17.2x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Shanghai Action Education TechnologyLTD as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Shanghai Action Education TechnologyLTD

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What Are Growth Metrics Telling Us About The Low P/E?

Shanghai Action Education TechnologyLTD's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 84% last year. Pleasingly, EPS has also lifted 84% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 23% per year during the coming three years according to the four analysts following the company. That's shaping up to be similar to the 25% per year growth forecast for the broader market.

With this information, we find it odd that Shanghai Action Education TechnologyLTD is trading at a P/E lower than the market. It may be that most investors are not convinced the company can achieve future growth expectations.

What We Can Learn From Shanghai Action Education TechnologyLTD's P/E?

The softening of Shanghai Action Education TechnologyLTD's shares means its P/E is now sitting at a pretty low level. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Shanghai Action Education TechnologyLTD currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.

You always need to take note of risks, for example - Shanghai Action Education TechnologyLTD has 1 warning sign we think you should be aware of.

If these risks are making you reconsider your opinion on Shanghai Action Education TechnologyLTD, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com