China Yuchai International Limited's (NYSE:CYD) Sentiment Matching Earnings

China Yuchai International Limited's (NYSE:CYD) price-to-earnings (or "P/E") ratio of 8.2x might make it look like a strong buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 19x and even P/E's above 38x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

China Yuchai International has been struggling lately as its earnings have declined faster than most other companies. 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. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

View our latest analysis for China Yuchai International

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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?

The only time you'd be truly comfortable seeing a P/E as depressed as China Yuchai International's is when the company's growth is on track to lag the market decidedly.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 15%. This means it has also seen a slide in earnings over the longer-term as EPS is down 18% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 9.7% per annum over the next three years. Meanwhile, the rest of the market is forecast to expand by 14% each year, which is noticeably more attractive.

In light of this, it's understandable that China Yuchai International's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

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 China Yuchai International's analyst forecasts revealed that its inferior earnings outlook 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with China Yuchai International, and understanding should be part of your investment process.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.

This article by Simply Wall St is general in nature. 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.

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