Baoxiniao Holding Co., Ltd. (SZSE:002154) shares have continued their recent momentum with a 25% gain in the last month alone. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 8.2% in the last twelve months.

Although its price has surged higher, Baoxiniao Holding's price-to-earnings (or "P/E") ratio of 13.7x might still make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 38x and even P/E's above 75x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

With earnings that are retreating more than the market's of late, Baoxiniao Holding has been very sluggish. 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. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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

In order to justify its P/E ratio, Baoxiniao Holding would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered a frustrating 12% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 4.1% 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 19% as estimated by the six analysts watching the company. That's shaping up to be materially lower than the 38% growth forecast for the broader market.

With this information, we can see why Baoxiniao Holding 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

Baoxiniao Holding's recent share price jump still sees its P/E sitting firmly flat on the ground. 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 Baoxiniao Holding's analyst forecasts revealed that its inferior earnings outlook 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. It's hard to see the share price rising strongly in the near future under these circumstances.

You always need to take note of risks, for example - Baoxiniao Holding has 1 warning sign we think you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.