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FinVolution Group's (NYSE:FINV) price-to-earnings (or "P/E") ratio of 2.6x might make it look like a strong buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 19x and even P/E's above 38x are quite common. 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.
Recent times haven't been advantageous for FinVolution Group as its earnings have been falling quicker than most other companies. 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. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on FinVolution Group.
Does Growth Match The Low P/E?
In order to justify its P/E ratio, FinVolution Group would need to produce anemic growth that's substantially trailing the market.
Retrospectively, the last year delivered a frustrating 25% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 6.0% per year as estimated by the two analysts watching the company. That's not great when the rest of the market is expected to grow by 14% per year.
In light of this, it's understandable that FinVolution Group's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.
What We Can Learn From FinVolution Group's P/E?
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
As we suspected, our examination of FinVolution Group's analyst forecasts revealed that its outlook for shrinking earnings 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
You should always think about risks. Case in point, we've spotted 5 warning signs for FinVolution Group you should be aware of, and 2 of them are a bit concerning.
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 P/E ratio below 20x).
This article by Simply Wall St is general in nature. 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.
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