Improved Earnings Required Before JiaoZuo WanFang Aluminum Manufacturing Co., Ltd (SZSE:000612) Stock's 26% Jump Looks Justified

JiaoZuo WanFang Aluminum Manufacturing Co., Ltd (SZSE:000612) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Notwithstanding the latest gain, the annual share price return of 7.1% isn't as impressive.

In spite of the firm bounce in price, JiaoZuo WanFang Aluminum Manufacturing's price-to-earnings (or "P/E") ratio of 22.9x might still make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 31x and even P/E's above 56x 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, JiaoZuo WanFang Aluminum Manufacturing has been doing very well. 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 that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for JiaoZuo WanFang Aluminum Manufacturing

Although there are no analyst estimates available for JiaoZuo WanFang Aluminum Manufacturing, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

There's an inherent assumption that a company should underperform the market for P/E ratios like JiaoZuo WanFang Aluminum Manufacturing's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 36%. Still, incredibly EPS has fallen 31% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 39% 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 JiaoZuo WanFang Aluminum Manufacturing 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. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On JiaoZuo WanFang Aluminum Manufacturing's P/E

Despite JiaoZuo WanFang Aluminum Manufacturing's shares building up a head of steam, its P/E still lags most other companies. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that JiaoZuo WanFang Aluminum Manufacturing maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for JiaoZuo WanFang Aluminum Manufacturing that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.