The investment philosophy of Peter Lynch, famous manager of the Fidelity Magellan Fund, focuses on locating companies with good, lasting growth that are available at fair prices. This "growth at a reasonable price" (GARP) method steers clear of the limits of speculative high-priced stocks and slow value stocks, instead looking for businesses with sound basics that can provide steady returns over many years. A main tool for locating these chances is the PEG ratio, which measures a stock's price-to-earnings (P/E) ratio against its earnings growth rate, with a number at or under 1 frequently pointing to a good price compared to growth. By joining this price check with tests for financial soundness, earnings, and acceptable debt, investors can search for companies that fit Lynch's ideas of lasting, clear growth.
Examining QFIN Holdings Inc (NASDAQ:QFIN)
QFIN Holdings Inc (NASDAQ:QFIN), previously Qifu Technology Inc, is a Shanghai-based credit technology service company. The company runs a platform that links borrowers with financial institutions in China, giving services from loan help and post-loan management to risk management software. Its business model is divided between credit-driven services, where it takes on some credit risk, and capital-light platform services. As a consumer finance company, its results are closely linked to domestic economic activity and credit cycles, making its basic financial soundness and effectiveness important for long-term investors.
Fit with Peter Lynch's GARP Standards
A search based on Peter Lynch's strategy points to QFIN as a choice that fits many of his main investment rules. The strategy focuses on lasting growth, fair price, and a good financial base, all areas where QFIN shows strong numbers.
- Lasting Earnings Growth: Lynch liked companies with steady, but not extreme, growth. QFIN's earnings per share (EPS) has increased at an average yearly rate of about 20% over the last five years. This fits inside the Lynch-based search's goal range of 15% to 30%, indicating a speed of increase that is solid yet possibly lasting, steering clear of the warning sign of very fast growth that can be hard to keep up.
- Good Price via the PEG Ratio: The central part of the GARP method is the PEG ratio. QFIN's PEG ratio, based on its past five-year growth, is very low at about 0.11. A ratio under 1 shows that the stock's price may not be completely accounting for its past earnings growth, a common sign Lynch used to find low-priced growth companies. This makes QFIN notable as a possibly inexpensive stock relative to its growth path.
- High Earnings and Effectiveness: Lynch searched for companies that are not only growing, but are also highly profitable and effective with capital. QFIN's return on equity (ROE) of more than 30% is much higher than the search's 15% minimum and puts it with the best in its field. A high ROE shows that management is successfully creating profits from shareholders' equity, a sign of a well-operated business.
- Careful Financial Soundness: To make sure of longevity, Lynch needed companies to have good balance sheets. QFIN does well here with a debt-to-equity ratio of 0.26, which is not only much lower than the search's limit of 0.6 but also matches Lynch's own liking for a ratio under 0.25. Also, its current ratio of 3.48 shows strong ability to cover near-term debts, giving a good safety net against economic drops or operational issues.
Basic Health Review: A Top-Level Summary
A full basic analysis of QFIN gives it a good total score of 8 out of 10, supporting the view shown by the Lynch search. The report points out an "excellent earnings score" along with "good financial health traits." Main positives mentioned include field-leading profit and operating margins, a very strong ability to pay debts shown by a low debt-to-free-cash-flow ratio, and a price thought to be low across several measures including P/E and Price/Free Cash Flow ratios.
The analysis does mention some areas for investor notice, like a recent drop in its dividend and predictions for a large slowing in EPS growth in the next few years compared to its past speed. This points to the value of the Lynch method's focus on knowing the lasting quality of growth, leading investors to study the reasons for this expected slowdown.
Locating More GARP Chances
QFIN shows one possible result from using a careful, Lynch-based search process. For investors wanting to find other companies that meet these standards for lasting growth at fair prices, the complete Peter Lynch strategy search is ready to examine. You can see the present results and change the settings to fit your own study by going to the Peter Lynch Screen on Chartmill.
Disclaimer: This article is for information only and is not investment guidance, a suggestion, or an offer to buy or sell any security. The analysis uses data and a set search method, it does not consider personal financial situations, risk comfort, or investment goals. Investors should do their own full study and think about talking with a qualified financial advisor before making any investment choices. Past results and search findings are not a guide for future returns.
