Yancoal Australia Ltd (ASX:YAL) shareholders won't be pleased to see that the share price has had a very rough month, dropping 27% and undoing the prior period's positive performance. The last month has meant the stock is now only up 7.1% during the last year.

Since its price has dipped substantially, given about half the companies in Australia have price-to-earnings ratios (or "P/E's") above 20x, you may consider Yancoal Australia as a highly attractive investment with its 5.5x 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.

For example, consider that Yancoal Australia's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. 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.

Check out our latest analysis for Yancoal Australia

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 Yancoal Australia's earnings, revenue and cash flow.

How Is Yancoal Australia's Growth Trending?

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

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 55%. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 26% shows it's noticeably less attractive on an annualised basis.

In light of this, it's understandable that Yancoal Australia's P/E sits below the majority of other companies. 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 Key Takeaway

Shares in Yancoal Australia have plummeted and its P/E is now low enough to touch the ground. 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 Yancoal Australia 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 Yancoal Australia (1 is concerning!) that you should be aware of.

Of course, you might also be able to find a better stock than Yancoal Australia. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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