When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 38x, you may consider HUAYU Automotive Systems Company Limited (SHSE:600741) as a highly attractive investment with its 7.9x 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.

There hasn't been much to differentiate HUAYU Automotive Systems' and the market's retreating earnings lately. It might be that many expect the company's earnings performance to degrade further, 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. At the very least, you'd be hoping that earnings don't fall off a cliff if your plan is to pick up some stock while it's out of favour.

How Is HUAYU Automotive Systems' Growth Trending?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 1.7%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 13% per annum as estimated by the analysts watching the company. That's not great when the rest of the market is expected to grow by 21% per annum.

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. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

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.

We've established that HUAYU Automotive Systems maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 1 warning sign for HUAYU Automotive Systems that you should be aware of.

If these risks are making you reconsider your opinion on HUAYU Automotive Systems, 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.