Earnings Working Against China Development Bank Financial Leasing Co., Ltd.'s (HKG:1606) Share Price Following 40% Dive

The China Development Bank Financial Leasing Co., Ltd. (HKG:1606) share price has fared very poorly over the last month, falling by a substantial 40%. Still, a bad month hasn't completely ruined the past year with the stock gaining 29%, which is great even in a bull market.

Since its price has dipped substantially, given about half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 10x, you may consider China Development Bank Financial Leasing as a highly attractive investment with its 3.8x P/E ratio. 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.

China Development Bank Financial Leasing certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you 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.

Check out our latest analysis for China Development Bank Financial Leasing

Want the full picture on analyst estimates for the company? Then our free report on China Development Bank Financial Leasing will help you uncover what's on the horizon.

Is There Any Growth For China Development Bank Financial Leasing?

There's an inherent assumption that a company should far underperform the market for P/E ratios like China Development Bank Financial Leasing's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 24% last year. The latest three year period has also seen a 27% overall rise in EPS, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 5.9% per annum as estimated by the one analyst watching the company. With the market predicted to deliver 16% growth per annum, the company is positioned for a weaker earnings result.

With this information, we can see why China Development Bank Financial Leasing is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

Shares in China Development Bank Financial Leasing have plummeted and its P/E is now low enough to touch the ground. 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.

As we suspected, our examination of China Development Bank Financial Leasing's analyst forecasts revealed that its inferior earnings outlook 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. It's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 3 warning signs for China Development Bank Financial Leasing (of which 1 can't be ignored!) you should know about.

Of course, you might also be able to find a better stock than China Development Bank Financial Leasing. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com