HUAYU Automotive Systems Company Limited's (SHSE:600741) Shares Lagging The Market But So Is The Business

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 34x, you may consider HUAYU Automotive Systems Company Limited (SHSE:600741) as a highly attractive investment with its 7.8x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

With earnings that are retreating more than the market's of late, HUAYU Automotive Systems has been very sluggish. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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Does Growth Match The Low P/E?

In order to justify its P/E ratio, HUAYU Automotive Systems would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered a frustrating 3.9% decrease to the company's bottom line. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 6.0% in total. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 7.6% each year as estimated by the analysts watching the company. Meanwhile, the broader market is forecast to expand by 19% each year, which paints a poor picture.

With this information, we are not surprised that HUAYU Automotive Systems is trading at a P/E lower than the market. 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.

The Bottom Line On HUAYU Automotive Systems' P/E

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of HUAYU Automotive Systems' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 1 warning sign for HUAYU Automotive Systems you should know about.

If you're unsure about the strength of HUAYU Automotive Systems' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.