Jade Bird Fire Co., Ltd.'s (SZSE:002960) Shares Bounce 28% But Its Business Still Trails The Market

Those holding Jade Bird Fire Co., Ltd. (SZSE:002960) shares would be relieved that the share price has rebounded 28% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 37% in the last twelve months.

Even after such a large jump in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 31x, you may still consider Jade Bird Fire as an attractive investment with its 16.9x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Jade Bird Fire 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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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 Jade Bird Fire's to be considered reasonable.

Retrospectively, the last year delivered a decent 3.6% gain to the company's bottom line. EPS has also lifted 26% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 20% over the next year. That's shaping up to be materially lower than the 41% growth forecast for the broader market.

With this information, we can see why Jade Bird Fire is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

Despite Jade Bird Fire's shares building up a head of steam, its P/E still lags most other companies. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Jade Bird Fire 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. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 2 warning signs for Jade Bird Fire 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.