With a price-to-earnings (or "P/E") ratio of 3.7x China Development Bank Financial Leasing Co., Ltd. (HKG:1606) may be sending very bullish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios greater than 10x and even P/E's higher than 20x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.
With earnings growth that's superior to most other companies of late, China Development Bank Financial Leasing has been doing relatively well. 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.
View our latest analysis for China Development Bank Financial Leasing
Is There Any Growth For China Development Bank Financial Leasing?
In order to justify its P/E ratio, China Development Bank Financial Leasing would need to produce anemic growth that's substantially trailing the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 21% last year. The latest three year period has also seen a 6.0% overall rise in EPS, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.
Shifting to the future, estimates from the only analyst covering the company suggest earnings should grow by 6.6% per year over the next three years. With the market predicted to deliver 12% growth each year, the company is positioned for a weaker earnings result.
In light of this, it's understandable that China Development Bank Financial Leasing's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
What We Can Learn From China Development Bank Financial Leasing's P/E?
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 China Development Bank Financial Leasing's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with China Development Bank Financial Leasing, and understanding them should be part of your investment process.
If you're unsure about the strength of China Development Bank Financial Leasing'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.