Further Upside For China Gingko Education Group Company Limited (HKG:1851) Shares Could Introduce Price Risks After 25% Bounce

Despite an already strong run, China Gingko Education Group Company Limited (HKG:1851) shares have been powering on, with a gain of 25% in the last thirty days. The last month tops off a massive increase of 166% in the last year.

Even after such a large jump in price, China Gingko Education Group's price-to-earnings (or "P/E") ratio of 5.2x might still make it look like a strong buy right now compared to the market in Hong Kong, where around half of the companies have P/E ratios above 13x and even P/E's above 27x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

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The recent earnings growth at China Gingko Education Group would have to be considered satisfactory if not spectacular. One possibility is that the P/E is low because investors think this good earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for China Gingko Education Group

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on China Gingko Education Group's earnings, revenue and cash flow.

Is There Any Growth For China Gingko Education Group?

There's an inherent assumption that a company should far underperform the market for P/E ratios like China Gingko Education Group's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 3.5%. Pleasingly, EPS has also lifted 296% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Comparing that to the market, which is only predicted to deliver 19% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

With this information, we find it odd that China Gingko Education Group is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Final Word

China Gingko Education Group's recent share price jump still sees its P/E sitting firmly flat on the ground. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that China Gingko Education Group currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

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

If these risks are making you reconsider your opinion on China Gingko Education Group, 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.