LexinFintech Holdings Ltd. (NASDAQ:LX) Might Not Be As Mispriced As It Looks
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With a price-to-earnings (or "P/E") ratio of 12.9x LexinFintech Holdings Ltd. (NASDAQ:LX) may be sending bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 17x and even P/E's higher than 33x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
LexinFintech Holdings could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
See our latest analysis for LexinFintech Holdings
Does LexinFintech Holdings Have A Relatively High Or Low P/E For Its Industry?
We'd like to see if P/E's within LexinFintech Holdings' industry might provide some colour around the company's low P/E ratio. The image below shows that the Consumer Finance industry as a whole has a P/E ratio significantly lower than the market. So it appears the company's ratio could be influenced somewhat by these industry numbers currently. Ordinarily, the majority of companies' P/E's would be compressed firmly by the general conditions within the Consumer Finance industry. Whilst this can be a heavy component, industry factors are normally secondary to company financials and earnings.
Keen to find out how analysts think LexinFintech Holdings' future stacks up against the industry? In that case, our free report is a great place to start.
Does Growth Match The Low P/E?
The only time you'd be truly comfortable seeing a P/E as low as LexinFintech Holdings' is when the company's growth is on track to lag the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 49%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 41% each year over the next three years. With the market only predicted to deliver 9.2% per annum, the company is positioned for a stronger earnings result.
With this information, we find it odd that LexinFintech Holdings is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.
What We Can Learn From LexinFintech Holdings' P/E?
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 LexinFintech Holdings currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.
We don't want to rain on the parade too much, but we did also find 3 warning signs for LexinFintech Holdings (1 can't be ignored!) that you need to be mindful of.
If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's 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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