Investors Don't See Light At End Of Weichai Heavy Machinery Co., Ltd.'s (SZSE:000880) Tunnel And Push Stock Down 26%

Weichai Heavy Machinery Co., Ltd. (SZSE:000880) shares have retraced a considerable 26% in the last month, reversing a fair amount of their solid recent performance. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 19% share price drop.

Following the heavy fall in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 28x, you may consider Weichai Heavy Machinery as an attractive investment with its 16.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Earnings have risen firmly for Weichai Heavy Machinery recently, which is pleasing to see. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform 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.

See our latest analysis for Weichai Heavy Machinery

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Weichai Heavy Machinery's earnings, revenue and cash flow.

How Is Weichai Heavy Machinery's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 16% gain to the company's bottom line. Pleasingly, EPS has also lifted 33% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Comparing that to the market, which is predicted to deliver 38% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we can see why Weichai Heavy Machinery is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Bottom Line On Weichai Heavy Machinery's P/E

The softening of Weichai Heavy Machinery's shares means its P/E is now sitting at a pretty low level. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Weichai Heavy Machinery revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 2 warning signs for Weichai Heavy Machinery (1 is significant!) that you should be aware of.

If these risks are making you reconsider your opinion on Weichai Heavy Machinery, 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.