There's No Escaping China YuHua Education Corporation Limited's (HKG:6169) Muted Earnings Despite A 33% Share Price Rise

The China YuHua Education Corporation Limited (HKG:6169) share price has done very well over the last month, posting an excellent gain of 33%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 10.0% over that time.

Although its price has surged higher, given about half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 10x, you may still consider China YuHua Education as a highly attractive investment with its 2.4x 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 limited.

China YuHua Education hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If you still 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.

Check out our latest analysis for China YuHua Education

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Is There Any Growth For China YuHua Education?

The only time you'd be truly comfortable seeing a P/E as depressed as China YuHua Education's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered a frustrating 36% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 14% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 10.0% per annum as estimated by the only analyst watching the company. With the market predicted to deliver 12% growth per annum, that's a disappointing outcome.

In light of this, it's understandable that China YuHua Education's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

What We Can Learn From China YuHua Education's P/E?

China YuHua Education's recent share price jump still sees its P/E sitting firmly flat on the ground. 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 China YuHua Education maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 3 warning signs for China YuHua Education you should be aware of, and 2 of them are potentially serious.

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