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Dunxin Financial Holdings Limited (NYSEMKT:DXF) shareholders have had their patience rewarded with a 35% share price jump in the last month. The last month tops off a massive increase of 256% in the last year.
Even after such a large jump in price, Dunxin Financial Holdings may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 10.9x, since almost half of all companies in the United States have P/E ratios greater than 21x and even P/E's higher than 42x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
For example, consider that Dunxin Financial Holdings' financial performance has been poor lately as it's earnings have been in decline. It might be that many expect the disappointing earnings performance to continue or accelerate, 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 Dunxin Financial Holdings
We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Dunxin Financial Holdings' earnings, revenue and cash flow.
What Are Growth Metrics Telling Us About The Low P/E?
Dunxin Financial Holdings' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.
Retrospectively, the last year delivered a frustrating 5.2% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 77% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Comparing that to the market, which is predicted to deliver 18% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.
In light of this, it's understandable that Dunxin Financial Holdings' P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.
The Final Word
Dunxin Financial Holdings' stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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.