With a price-to-earnings (or "P/E") ratio of 59.4x Chengdu Jiafaantai Education Technology Co.,Ltd. (SZSE:300559) may be sending very bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 34x and even P/E's lower than 20x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Recent times have been pleasing for Chengdu Jiafaantai Education TechnologyLtd as its earnings have risen in spite of the market's earnings going into reverse. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Chengdu Jiafaantai Education TechnologyLtd

Is There Enough Growth For Chengdu Jiafaantai Education TechnologyLtd?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Chengdu Jiafaantai Education TechnologyLtd's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 16% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 56% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 118% over the next year. With the market only predicted to deliver 43%, the company is positioned for a stronger earnings result.

With this information, we can see why Chengdu Jiafaantai Education TechnologyLtd 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 Chengdu Jiafaantai Education TechnologyLtd'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 Chengdu Jiafaantai Education TechnologyLtd 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.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Chengdu Jiafaantai Education TechnologyLtd you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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