HUAYU Automotive Systems Company Limited's (SHSE:600741) price-to-earnings (or "P/E") ratio of 7.6x might make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 27x and even P/E's above 48x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Recent times have been pleasing for HUAYU Automotive Systems as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. 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.

Does Growth Match The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like HUAYU Automotive Systems' to be considered reasonable.

Retrospectively, the last year delivered a decent 6.4% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 52% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 5.7% as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 41%, which is noticeably more attractive.

With this information, we can see why HUAYU Automotive Systems is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From HUAYU Automotive Systems' P/E?

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.

As we suspected, our examination of HUAYU Automotive Systems' analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for HUAYU Automotive Systems with six simple checks will allow you to discover any risks that could be an issue.

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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