Neusoft Education Technology Co. Limited's (HKG:9616) Popularity With Investors Is Clear

Neusoft Education Technology Co. Limited's (HKG:9616) price-to-earnings (or "P/E") ratio of 34.4x might make it look like a strong sell right now compared to the market in Hong Kong, where around half of the companies have P/E ratios below 11x and even P/E's below 6x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Neusoft Education Technology hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for Neusoft Education Technology

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Neusoft Education Technology.

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

Neusoft Education Technology'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.

Retrospectively, the last year delivered a frustrating 51% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 40% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 63% per annum over the next three years. That's shaping up to be materially higher than the 20% each year growth forecast for the broader market.

With this information, we can see why Neusoft Education Technology is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Neusoft Education Technology's P/E

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Neusoft Education Technology maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

You always need to take note of risks, for example - Neusoft Education Technology has 2 warning signs we think you should be aware of.

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

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