Take Care Before Diving Into The Deep End On New Oriental Education & Technology Group Inc. (NYSE:EDU)

There wouldn't be many who think New Oriental Education & Technology Group Inc.'s (NYSE:EDU) price-to-earnings (or "P/E") ratio of 19.5x is worth a mention when the median P/E in the United States is similar at about 19x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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New Oriental Education & Technology Group certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for New Oriental Education & Technology Group

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Does Growth Match The P/E?

In order to justify its P/E ratio, New Oriental Education & Technology Group would need to produce growth that's similar to the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 27% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Looking ahead now, EPS is anticipated to climb by 26% during the coming year according to the analysts following the company. That's shaping up to be materially higher than the 13% growth forecast for the broader market.

With this information, we find it interesting that New Oriental Education & Technology Group is trading at a fairly similar P/E to the market. It may be that most investors aren't convinced the company can achieve future growth expectations.

What We Can Learn From New Oriental Education & Technology Group's P/E?

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.

Our examination of New Oriental Education & Technology Group's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for New Oriental Education & Technology Group with six simple checks will allow you to discover any risks that could be an issue.

If you're unsure about the strength of New Oriental Education & Technology Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.