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Qudian Inc. (NYSE:QD) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 82% loss during that time.
Since its price has dipped substantially, Qudian may be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 2.5x, since almost half of all companies in the United States have P/E ratios greater than 18x and even P/E's higher than 37x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
Recent times haven't been advantageous for Qudian 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.
Keen to find out how analysts think Qudian's future stacks up against the industry? In that case, our free report is a great place to start.
How Is Qudian's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as depressed as Qudian's is when the company's growth is on track to lag the market decidedly.
Retrospectively, the last year delivered a frustrating 72% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 82% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 47% as estimated by the four analysts watching the company. Meanwhile, the broader market is forecast to expand by 5.5%, which paints a poor picture.
With this information, we are not surprised that Qudian is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.
The Bottom Line On Qudian's P/E
Having almost fallen off a cliff, Qudian's share price has pulled its P/E way down as well. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We've established that Qudian maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. 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.
And what about other risks? Every company has them, and we've spotted 3 warning signs for Qudian you should know about.
Of course, you might also be able to find a better stock than Qudian. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.
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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