Despite an already strong run, MindChamps PreSchool Limited (SGX:CNE) shares have been powering on, with a gain of 46% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 32% in the last year.

In spite of the firm bounce in price, MindChamps PreSchool's price-to-earnings (or "P/E") ratio of 6.8x might still make it look like a buy right now compared to the market in Singapore, where around half of the companies have P/E ratios above 13x and even P/E's above 20x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

With earnings growth that's exceedingly strong of late, MindChamps PreSchool has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for MindChamps PreSchool

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on MindChamps PreSchool's earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The Low P/E?

MindChamps PreSchool's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered an exceptional 127% gain to the company's bottom line. As a result, it also grew EPS by 26% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 5.7% shows it's noticeably more attractive on an annualised basis.

With this information, we find it odd that MindChamps PreSchool is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

What We Can Learn From MindChamps PreSchool's P/E?

The latest share price surge wasn't enough to lift MindChamps PreSchool's P/E close to the market median. 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 MindChamps PreSchool currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

You need to take note of risks, for example - MindChamps PreSchool has 3 warning signs (and 1 which is concerning) we think you should know about.

If these risks are making you reconsider your opinion on MindChamps PreSchool, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.