Jiangsu Pacific Precision Forging Co., Ltd. (SZSE:300258) shareholders won't be pleased to see that the share price has had a very rough month, dropping 26% and undoing the prior period's positive performance. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 22% share price drop.
Even after such a large drop in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 32x, you may still consider Jiangsu Pacific Precision Forging as an attractive investment with its 18x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
Jiangsu Pacific Precision Forging 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.
Check out our latest analysis for Jiangsu Pacific Precision Forging
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 Jiangsu Pacific Precision Forging's to be considered reasonable.
Retrospectively, the last year delivered an exceptional 21% gain to the company's bottom line. The latest three year period has also seen an excellent 97% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.
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 43% growth , the company is positioned for a weaker earnings result.
With this information, we can see why Jiangsu Pacific Precision Forging 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.
The Final Word
Jiangsu Pacific Precision Forging's P/E has taken a tumble along with its share price. 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 Jiangsu Pacific Precision Forging maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. 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.
Plus, you should also learn about these 3 warning signs we've spotted with Jiangsu Pacific Precision Forging.
You might be able to find a better investment than Jiangsu Pacific Precision Forging. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.
