China Yuchai International Limited (NYSE:CYD) Might Not Be As Mispriced As It Looks After Plunging 26%

China Yuchai International Limited (NYSE:CYD) shareholders won't be pleased to see that the share price has had a very rough month, dropping 26% and undoing the prior period's positive performance. Longer-term shareholders would now have taken a real hit with the stock declining 4.1% in the last year.

Following the heavy fall in price, given about half the companies in the United States have price-to-earnings ratios (or "P/E's") above 20x, you may consider China Yuchai International as a highly attractive investment with its 7.1x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

China Yuchai International certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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 China Yuchai International

Keen to find out how analysts think China Yuchai International's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For China Yuchai International?

China Yuchai International's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

If we review the last year of earnings growth, the company posted a worthy increase of 15%. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 24% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 10% per annum over the next three years. That's shaping up to be similar to the 10% per year growth forecast for the broader market.

In light of this, it's peculiar that China Yuchai International's P/E sits below the majority of other companies. It may be that most investors are not convinced the company can achieve future growth expectations.

What We Can Learn From China Yuchai International's P/E?

Shares in China Yuchai International have plummeted and its P/E is now low enough to touch the ground. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of China Yuchai International's analyst forecasts revealed that its market-matching earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

You should always think about risks. Case in point, we've spotted 1 warning sign for China Yuchai International you should be aware of.

If you're unsure about the strength of China Yuchai International's 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.