QFIN HOLDINGS INC-ADR (NASDAQ:QFIN) Presents a Compelling Case for Value Investors

Value investing remains a time-tested strategy focused on identifying companies trading below their intrinsic worth. This approach, pioneered by Benjamin Graham and later refined by investors like Warren Buffett, emphasizes buying undervalued securities with strong fundamentals, allowing investors to potentially benefit from price corrections as the market recognizes true value over time. A disciplined value strategy incorporates not only attractive valuation metrics but also considers financial health, profitability, and sustainable growth to avoid value traps and ensure long-term stability.

QFIN HOLDINGS INC-ADR (NASDAQ:QFIN) emerges as a notable candidate through this lens, particularly when evaluated using a systematic screening methodology that emphasizes solid valuation alongside respectable fundamentals. The company, a Shanghai-based provider of credit technology services, operates in the consumer finance industry and appears to present a notable discrepancy between its market price and underlying business strength.

Valuation Metrics

QFIN’s valuation metrics stand out as exceptionally attractive, which is the cornerstone of any value investment thesis. The stock trades at a significant discount to both industry peers and broader market indices, suggesting potential undervaluation.

• P/E Ratio: At 3.86, it is substantially lower than the industry average of 16.92 and the S&P 500's 27.20.
• Forward P/E: 3.37, compared to an industry average of 10.75 and S&P 500 average of 22.71.
• Enterprise Value/EBITDA: Ranks cheaper than nearly 89% of its industry competitors.

These figures indicate the market is pricing QFIN conservatively relative to its current earnings and future expectations. For value investors, such low multiples provide a margin of safety, a buffer against overestimation errors or market downturns, which is a fundamental principle of the strategy.

Financial Health

A strong financial foundation is critical for value stocks to weather economic cycles and avoid the pitfalls of excessive leverage or liquidity crunches. QFIN demonstrates sound financial health, scoring well in solvency and liquidity measures.

• Debt Management: A low Debt-to-Equity ratio of 0.26 and a strong Debt-to-Free-Cash-Flow ratio of 0.58 indicate manageable debt levels and ample capacity to cover obligations.
• Liquidity Position: Current and Quick ratios both stand at 3.48, signaling more than sufficient short-term asset coverage and outperforming over 81% of industry peers.

This financial stability reduces bankruptcy risk and provides the company flexibility to invest in growth or return capital to shareholders, aligning with the value investing emphasis on durable business models.

Profitability Strength

Profitability is a key indicator of a company’s operational efficiency and competitive advantage. QFIN performs well here, with metrics that suggest it is not just cheap, but also a high-quality business.

• Return Metrics: ROA of 12.14%, ROE of 30.15%, and ROIC of 14.53% all rank in the top decile of its industry.
• Margins: An impressive Operating Margin of 44.19% and Profit Margin of 38.67% highlight efficient operations and strong pricing power.

High profitability supports the notion that the company’s intrinsic value is sound, as it consistently generates strong returns on capital, a trait value investors seek to ensure the undervaluation is temporary and not indicative of a broken business.

Growth Trajectory

While pure value stocks sometimes lack growth, QFIN shows a healthy balance of historical performance and future expectations, reducing the risk of stagnation.

• Historical Growth: EPS grew 71.02% over the past year and has averaged nearly 20% annually over recent years. Revenue growth has also been solid, averaging 13.24%.
• Future Expectations: Analysts project EPS growth of 17.81% and revenue growth of 8.48% annually moving forward.

This growth profile suggests the company is not in decline, supporting the value investing premise that the market will eventually recognize and correct the undervaluation as the business continues to expand.

Conclusion

QFIN presents a strong case as an undervalued stock with sound fundamentals. Its remarkably low valuation multiples, combined with excellent profitability, solid financial health, and a positive growth trajectory, make it a noteworthy candidate for investors employing a value strategy. The company’s fundamental report, available here, provides a detailed breakdown of these strengths.

For investors interested in discovering other companies that meet similar criteria of good valuation, solid profitability, financial health, and growth, further results can be explored using this Decent Value stock screen.

Disclaimer: This article is for informational purposes only and does not constitute investment advice. The analysis is based on available data and does not guarantee future performance. Investors should conduct their own research and consider their financial situation and risk tolerance before making any investment decisions.