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Those holding China Kepei Education Group (HKG:1890) shares must be pleased that the share price has rebounded 35% in the last thirty days. But unfortunately, the stock is still down by 5.7% over a quarter. The full year gain of 22% is pretty reasonable, too.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). The implication here is that deep value investors might steer clear when expectations of a company are too high. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
View our latest analysis for China Kepei Education Group
How Does China Kepei Education Group's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 17.55 that there is some investor optimism about China Kepei Education Group. The image below shows that China Kepei Education Group has a higher P/E than the average (12.9) P/E for companies in the consumer services industry.
Its relatively high P/E ratio indicates that China Kepei Education Group shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.
China Kepei Education Group's earnings per share were pretty steady over the last year. And over the longer term (5 years) earnings per share have decreased 32% annually. So it would be surprising to see a high P/E.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.