CNFinance Holdings Limited (NYSE:CNF) shares have had a really impressive month, gaining 75% after a shaky period beforehand. But the last month did very little to improve the 51% share price decline over the last year.

Even after such a large jump in price, CNFinance Holdings may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 7.8x, since almost half of all companies in the United States have P/E ratios greater than 19x and even P/E's higher than 35x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

For instance, CNFinance Holdings' receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. 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.

How Is CNFinance Holdings' Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like CNFinance Holdings' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 30% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 60% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 15% 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 CNFinance Holdings' P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From CNFinance Holdings' P/E?

Shares in CNFinance Holdings are going to need a lot more upward momentum to get the company's P/E out of its slump. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of CNFinance Holdings revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about these 5 warning signs we've spotted with CNFinance Holdings (including 3 which don't sit too well with us).

If these risks are making you reconsider your opinion on CNFinance Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.