Why Investors Shouldn't Be Surprised By China General Education Group Limited's (HKG:2175) 29% Share Price Plunge

Explore China General Education Group's Fair Values from the Community and select yours

The China General Education Group Limited (HKG:2175) share price has fared very poorly over the last month, falling by a substantial 29%. Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.

Although its price has dipped substantially, China General Education Group's price-to-earnings (or "P/E") ratio of 8.8x might still make it look like a 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 28x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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For instance, China General Education Group's receding earnings in recent times would have to be some food for thought. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. 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.

See our latest analysis for China General Education Group

Although there are no analyst estimates available for China General Education Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is China General Education Group's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as China General Education Group's is when the company's growth is on track to lag 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 26%. The last three years don't look nice either as the company has shrunk EPS by 23% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 21% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's understandable that China General Education Group's P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

China General Education Group's recently weak share price has pulled its P/E below most other companies. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of China General Education Group revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

You should always think about risks. Case in point, we've spotted 2 warning signs for China General Education Group you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.