China Development Bank Financial Leasing Co., Ltd. (HKG:1606) shares have continued their recent momentum with a 27% gain in the last month alone. The annual gain comes to 113% following the latest surge, making investors sit up and take notice.
Although its price has surged higher, you could still be forgiven for feeling indifferent about China Development Bank Financial Leasing's P/E ratio of 8x, since the median price-to-earnings (or "P/E") ratio in Hong Kong is also close to 9x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
For instance, China Development Bank Financial Leasing's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is moderate because investors think the company might still do enough to be in line with the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.
What Are Growth Metrics Telling Us About The P/E?
China Development Bank Financial Leasing's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 17%. Regardless, EPS has managed to lift by a handy 19% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 23% shows it's noticeably less attractive on an annualised basis.
With this information, we find it interesting that China Development Bank Financial Leasing is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.
The Bottom Line On China Development Bank Financial Leasing's P/E
China Development Bank Financial Leasing's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that China Development Bank Financial Leasing currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
There are also other vital risk factors to consider and we've discovered 3 warning signs for China Development Bank Financial Leasing (1 shouldn't be ignored!) that you should be aware of before investing here.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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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.