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China Education Alliance (CEU) provides on-site training and online education to both children and adults in China. The company trades for $120 million, but earned $15 million in 2009, expects to increase revenues by 30% this year, and has a $75 million net cash position. Its P/E drops to 3 once you subtract out its cash position. This is a very cheap asking price for a growing company in a needed field in a high-growth economy, but it does have a few risks.

For one thing, the company may appear too good to be true for some investors wary of fraud. The company is not audited by a big-name firm; however, the auditors of this company do have several other clients, and do pick up their phones in both their New York and Florida offices, confirming their existence. However, they have been accused of being a little bit on the negligent side in the past. China Education Alliance management did state on their last conference call that it is considering switching to a more recognizable auditor now that it has grown considerably.

Another item that may scare investors is the dilution of the company's stock. The company has gone from 25 million to 31 million shares in the last year, due to conversion of preferred shares into common, and the exercise of warrants and options. The share count should be more stable going forward, as no more pref shares exist, there are no more warrants outstanding, and options are being issued at a more reasonable clip (and only 400,000 remain outstanding).

The company does trade at a premium to book value, so the investor does have to believe this company has some sort of advantage that can keep competition at bay. But there are other, well-capitalized companies that appear to compete with CEU.

Despite the fact that management believes its shares to be undervalued, it appears intent on using its large cash balance to continue to grow, which could be very good (if returns on that capital continue as they are currently) or very bad (if competition forces returns to more normal levels) for investors.

The upside for this company appears quite high. Investors will have to determine whether the downside risks are worth accepting in return.

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