Valiant Co.,Ltd's (SZSE:002643) Shares Bounce 31% But Its Business Still Trails The Market

Valiant Co.,Ltd (SZSE:002643) shares have continued their recent momentum with a 31% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 15% over that time.

Although its price has surged higher, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 37x, you may still consider ValiantLtd as an attractive investment with its 26.3x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

ValiantLtd has been struggling lately as its earnings have declined faster than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

View our latest analysis for ValiantLtd

Want the full picture on analyst estimates for the company? Then our free report on ValiantLtd will help you uncover what's on the horizon.

Is There Any Growth For ValiantLtd?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 26%. As a result, earnings from three years ago have also fallen 28% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 24% as estimated by the six analysts watching the company. With the market predicted to deliver 39% growth , the company is positioned for a weaker earnings result.

With this information, we can see why ValiantLtd is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From ValiantLtd's P/E?

The latest share price surge wasn't enough to lift ValiantLtd's P/E close to the market median. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that ValiantLtd maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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 these conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with ValiantLtd, and understanding should be part of your investment process.

If you're unsure about the strength of ValiantLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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.