North Industries Group Red Arrow Co., Ltd (SZSE:000519) Stock Catapults 26% Though Its Price And Business Still Lag The Market

North Industries Group Red Arrow Co., Ltd (SZSE:000519) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

In spite of the firm bounce in price, North Industries Group Red Arrow may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 26.7x, since almost half of all companies in China have P/E ratios greater than 30x and even P/E's higher than 58x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

North Industries Group Red Arrow 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 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.

View our latest analysis for North Industries Group Red Arrow

Keen to find out how analysts think North Industries Group Red Arrow's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For North Industries Group Red Arrow?

There's an inherent assumption that a company should underperform the market for P/E ratios like North Industries Group Red Arrow's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 244% gain to the company's bottom line. Pleasingly, EPS has also lifted 83% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 9.3% per year as estimated by the only analyst watching the company. With the market predicted to deliver 19% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's understandable that North Industries Group Red Arrow'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.

What We Can Learn From North Industries Group Red Arrow's P/E?

North Industries Group Red Arrow's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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.

As we suspected, our examination of North Industries Group Red Arrow's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You should always think about risks. Case in point, we've spotted 1 warning sign for North Industries Group Red Arrow you should be aware of.

You might be able to find a better investment than North Industries Group Red Arrow. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.