Yes, the sentence is grammatically correct. It means that the person being discussed is not as negative or bad as they had previously imagined or labeled her to be. In other words, after getting to know her better or reconsidering their initial judgment, they found her to be more positive or better than they expected.
Here are a few rephrased options for the sentence:
1. "She’s not as bad as we thought and labeled her."
2. "She’s better


