Xueda (Xiamen) Education Technology Group Co., Ltd (SZSE:000526) shareholders won't be pleased to see that the share price has had a very rough month, dropping 25% and undoing the prior period's positive performance. Looking back over the past twelve months the stock has been a solid performer regardless, with a gain of 24%.

After such a large drop in price, Xueda (Xiamen) Education Technology Group may be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 27.3x, since almost half of all companies in China have P/E ratios greater than 35x and even P/E's higher than 68x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Xueda (Xiamen) Education Technology Group certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Is There Any Growth For Xueda (Xiamen) Education Technology Group?

There's an inherent assumption that a company should underperform the market for P/E ratios like Xueda (Xiamen) Education Technology Group's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 75% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 234% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next year should generate growth of 35% as estimated by the six analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 40%, which is noticeably more attractive.

In light of this, it's understandable that Xueda (Xiamen) Education Technology Group's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

Xueda (Xiamen) Education Technology Group's P/E has taken a tumble along with its share price. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Xueda (Xiamen) Education Technology Group's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Xueda (Xiamen) Education Technology Group with six simple checks on some of these key factors.

If you're unsure about the strength of Xueda (Xiamen) 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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