Yangtze Optical Fibre And Cable Joint Stock Limited Company (HKG:6869) Stock Catapults 37% Though Its Price And Business Still Lag The Market

Yangtze Optical Fibre And Cable Joint Stock Limited Company (HKG:6869) shareholders have had their patience rewarded with a 37% share price jump in the last month. Notwithstanding the latest gain, the annual share price return of 3.4% isn't as impressive.

In spite of the firm bounce in price, Yangtze Optical Fibre And Cable Limited's price-to-earnings (or "P/E") ratio of 7x might still make it look like a buy right now compared to the market in Hong Kong, where around half of the companies have P/E ratios above 11x and even P/E's above 21x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times have been advantageous for Yangtze Optical Fibre And Cable Limited as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Yangtze Optical Fibre And Cable Limited

Keen to find out how analysts think Yangtze Optical Fibre And Cable Limited's future stacks up against the industry? In that case, our free report is a great place to start.

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 Yangtze Optical Fibre And Cable Limited's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 371% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 41% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 4.3% per year during the coming three years according to the six analysts following the company. That's not great when the rest of the market is expected to grow by 12% per year.

With this information, we are not surprised that Yangtze Optical Fibre And Cable Limited is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

Despite Yangtze Optical Fibre And Cable Limited's shares building up a head of steam, its P/E still lags most other companies. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Yangtze Optical Fibre And Cable Limited's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Yangtze Optical Fibre And Cable Limited (1 is significant) you should be aware of.

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

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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.