Why We're Not Concerned Yet About Scholar Education Group's (HKG:1769) 25% Share Price Plunge

The Scholar Education Group (HKG:1769) share price has fared very poorly over the last month, falling by a substantial 25%. Still, a bad month hasn't completely ruined the past year with the stock gaining 66%, which is great even in a bull market.

In spite of the heavy fall in price, given close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 9x, you may still consider Scholar Education Group as a stock to avoid entirely with its 15.4x 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 lofty.

As an illustration, earnings have deteriorated at Scholar Education Group over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Scholar Education Group

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Scholar Education Group will help you shine a light on its historical performance.

How Is Scholar Education Group's Growth Trending?

Scholar Education Group's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 1.1%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 172% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 21% shows it's noticeably more attractive on an annualised basis.

In light of this, it's understandable that Scholar Education Group's P/E sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Bottom Line On Scholar Education Group's P/E

Even after such a strong price drop, Scholar Education Group's P/E still exceeds the rest of the market significantly. 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 Scholar Education Group revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 1 warning sign for Scholar Education Group you should be aware of.

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.