Despite an already strong run, Wisdom Education International Holdings Company Limited (HKG:6068) shares have been powering on, with a gain of 33% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 18% is also fairly reasonable.

Although its price has surged higher, Wisdom Education International Holdings' price-to-earnings (or "P/E") ratio of 4.7x might still make it look like a buy right now compared to the market in Hong Kong, where around half of the companies have P/E ratios above 9x and even P/E's above 18x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Wisdom Education International Holdings certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If you 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.

Is There Any Growth For Wisdom Education International Holdings?

There's an inherent assumption that a company should underperform the market for P/E ratios like Wisdom Education International Holdings' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 71% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 70% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 23% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we are not surprised that Wisdom Education International Holdings is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Final Word

Wisdom Education International Holdings' stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Wisdom Education International Holdings revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Wisdom Education International Holdings (2 are significant) you should be aware of.

Of course, you might also be able to find a better stock than Wisdom Education International Holdings. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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