LexinFintech Holdings (NASDAQ:LX) shares have continued recent momentum with a 31% gain in the last month alone. Looking back a bit further, we're also happy to report the stock is up 68% in the last year.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that deep value investors might steer clear when expectations of a company are too high. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
How Does LexinFintech Holdings's P/E Ratio Compare To Its Peers?
LexinFintech Holdings's P/E of 7.47 indicates relatively low sentiment towards the stock. If you look at the image below, you can see LexinFintech Holdings has a lower P/E than the average (8.5) in the consumer finance industry classification.
This suggests that market participants think LexinFintech Holdings will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
It's nice to see that LexinFintech Holdings grew EPS by a stonking 50% in the last year.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
LexinFintech Holdings's Balance Sheet
LexinFintech Holdings's net debt is 21% of its market cap. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.
The Bottom Line On LexinFintech Holdings's P/E Ratio
LexinFintech Holdings has a P/E of 7.5. That's below the average in the US market, which is 18.8. The EPS growth last year was strong, and debt levels are quite reasonable. If it continues to grow, then the current low P/E may prove to be unjustified. Given analysts are expecting further growth, one might have expected a higher P/E ratio. That may be worth further research. What we know for sure is that investors are becoming less uncomfortable about LexinFintech Holdings's prospects, since they have pushed its P/E ratio from 5.7 to 7.5 over the last month. If you like to buy stocks that could be turnaround opportunities, then this one might be a candidate; but if you're more sensitive to price, then you may feel the opportunity has passed.
Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than LexinFintech Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.
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