Panda Financial Holding Corp., Ltd. (SHSE:600599) shareholders are no doubt pleased to see that the share price has bounced 26% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 15% over that time.
In spite of the firm bounce in price, it's still not a stretch to say that Panda Financial Holding's price-to-earnings (or "P/E") ratio of 30.2x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 32x. 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 example, consider that Panda Financial Holding's financial performance has been poor lately as its earnings have been in decline. 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 you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.
Does Growth Match The P/E?
There's an inherent assumption that a company should be matching the market for P/E ratios like Panda Financial Holding's to be considered reasonable.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 20%. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
This is in contrast to the rest of the market, which is expected to grow by 37% over the next year, materially higher than the company's recent medium-term annualised growth rates.
In light of this, it's curious that Panda Financial Holding's P/E sits in line with the majority of other companies. 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. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.
The Bottom Line On Panda Financial Holding's P/E
Panda Financial Holding's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
Our examination of Panda Financial Holding revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. Right now we are uncomfortable with the P/E as this earnings performance isn't likely to support a more positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Panda Financial Holding with six simple checks on some of these key factors.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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