In the world of long-term investing, few strategies carry the weight and track record of Peter Lynch’s approach. As the legendary manager of Fidelity’s Magellan Fund, Lynch supported a philosophy of finding "growth at a reasonable price" (GARP). His method centers on finding profitable, financially sound companies with steady growth rates that are not yet overvalued by the market. The aim is not to follow the latest trends, but to build a varied portfolio of understandable businesses that can increase returns over ten years or more. A recent filter based on Lynch’s main rules has identified one such candidate: X Financial-ADR (NYSE:XYF).
Examining X Financial
X Financial works as an online personal finance company based in Shenzhen, China. It provides a technology platform that connects borrowers with institutional funding partners, mainly offering unsecured personal credit loans through its main product, Xiaoying Credit Loan. The company also provides secured loan products like housing loans. As a fintech company in a large domestic market, its business model depends on efficient credit assessment and scalable technology, a modern version of a classic financial intermediary.
How XYF Matches Lynch’s Main Ideas
Peter Lynch’s filter uses specific, measurable rules to search for companies that balance growth, profit, and careful financial management. X Financial’s current numbers show a strong match with these rules.
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Steady Earnings Growth: Lynch looked for companies increasing earnings per share (EPS) between 15% and 30% each year over five years, thinking growth outside this range was often not steady. XYF reports a five-year EPS growth rate of 16.75%. This puts it directly within Lynch’s desired range, showing a history of consistent, controlled increase rather than sudden, possibly unsteady growth.
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Fair Valuation (The PEG Ratio): Maybe the most important Lynch measure is the Price/Earnings to Growth (PEG) ratio. A PEG of 1 or less implies the stock’s price fairly matches its growth rate. XYF’s PEG ratio, based on its five-year growth, is very low at 0.053. This shows the market is pricing its shares at a large discount to its past growth path, a main sign for value-focused growth investors.
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High Profit (Return on Equity): Lynch required a high return on equity (ROE) as a mark of an effective, well-run company that creates strong profits from shareholder investments. XYF’s ROE of 22.61% easily passes the 15% level, suggesting the company is skilled at using its equity to create earnings.
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Financial Soundness Tests: To avoid risky balance sheets, Lynch focused on low debt and good short-term cash health.
- Debt/Equity Ratio: XYF’s ratio of 0.50 is under the filter’s limit of 0.6 and shows a balanced method for funding, using more equity than debt.
- Current Ratio: At 1.47, XYF’s current ratio indicates it has enough short-term assets to pay its near-term debts, passing Lynch’s cash health test.
Basic Soundness and Market Setting
A wider basic analysis of XYF gives more detail. The company receives a good total rating, with specific high points in profit. Its profit and operating margins are some of the best in the consumer finance industry, and its Return on Invested Capital (ROIC) is very high. The valuation numbers are notable, with a Price/Earnings ratio of only 0.89, much lower than both industry and S&P 500 averages. However, the analysis also notes some points of care, including an average Altman-Z score for financial health and no available analyst estimates for future growth, which adds doubt.
This setting of strong past profit combined with a very low valuation forms a classic Lynch-type situation: a company doing well basically but apparently missed or undervalued by the wider market. While the S&P 500 shows a positive short-term direction, Lynch’s strategy purposely pays no attention to such short-term changes, focusing instead on these basic business qualities for long-term ownership.
Summary and Points for Investors
X Financial shows a strong profile for investors following the GARP philosophy. It shows a history of steady earnings growth, high profit, and careful financial management, all while trading at a large discount to its past results. The very low PEG ratio is the main part of this view, suggesting the market has not yet recognized the company’s growth and quality.
Certainly, no filter replaces complete research. Possible investors must think about the specific risks of the Chinese fintech sector, including regulatory shifts and economic changes. The absence of forward analyst estimates also needs investors to do their own work on the company’s future possibilities.
For investors wanting to look at other companies that fit this careful method, the full Peter Lynch Strategy filter can give a broader list of choices for more review.
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Disclaimer: This article is for information only and does not form financial advice, a suggestion, or an offer to buy or sell any securities. Investing includes risk, including the possible loss of original investment. You should do your own research and talk with a qualified financial advisor before making any investment choices.
