• If you are wondering whether China Yuchai International's current share price reflects its underlying value, you are not alone in asking that question.
• The stock last closed at US$43.73, with returns of 6.1% over 7 days, 10.4% over 30 days, 18.1% year to date, 156.0% over 1 year and a very large 3 year gain that is around 5x, plus a 246.9% return over 5 years.
• Recent coverage has focused on how this long run of strong returns has put China Yuchai International on more investors' radars, especially those comparing machinery stocks. At the same time, the stock has been discussed in the context of broader interest in capital goods companies listed in the US. This helps explain some of the attention around these price moves.
• On Simply Wall St's valuation framework, China Yuchai International earns a value score of 6 out of 6. The rest of this article will unpack how different valuation methods arrive at that view while also pointing you to a more complete way to think about value at the end.

Approach 1: China Yuchai International Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow, or DCF, model estimates what a stock could be worth by projecting the cash the company might generate in the future and then discounting those cash flows back to today.

For China Yuchai International, the model used is a 2 Stage Free Cash Flow to Equity approach, based on cash flow projections in CN¥. The latest twelve month free cash flow is CN¥299.88m. Analyst estimates and Simply Wall St extrapolations point to projected free cash flow of CN¥1,477m in 2028, with a path of annual projections out to 2035.

These projected cash flows are discounted and summed to arrive at an estimated intrinsic value of US$110.72 per share. Compared with the recent share price of US$43.73, the DCF output implies that the stock trades at a 60.5% discount to this estimate, which suggests it is undervalued on this model.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests China Yuchai International is undervalued by 60.5%. Track this in your watchlist or portfolio, or discover 51 more high quality undervalued stocks.

Approach 2: China Yuchai International Price vs Earnings

For profitable companies, the P/E ratio is a useful way to think about value because it links what you pay for the stock to the earnings the company is already generating. A higher or lower P/E can make sense depending on what the market expects for future growth and how much risk investors see in those earnings.

China Yuchai International currently trades on a P/E of 20.76x. That sits below both the Machinery industry average P/E of 27.31x and a peer group average of 23.63x, which indicates the stock is priced more cautiously than many similar companies. However, simple comparisons with peers or the industry do not show whether this gap is justified.

Simply Wall St’s Fair Ratio metric estimates what a more tailored P/E might look like at 30.96x by factoring in elements such as earnings growth characteristics, industry, profit margins, market cap and company specific risks. Because Fair Ratio adjusts for these features, it can give a more rounded view than a straightforward peer or sector comparison. Set against the current P/E of 20.76x, the Fair Ratio points to China Yuchai International trading below that modelled level.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your China Yuchai International Narrative

Earlier it was mentioned that there is an even better way to understand valuation. Narratives bring that to life by letting you attach a clear story about China Yuchai International to your numbers, linking your view on its future revenue, earnings and margins to a forecast and then to a fair value that you can easily compare with the current share price.

On Simply Wall St’s Community page, Narratives are an accessible tool used by millions of investors. Each Narrative sets out assumptions and a fair value, then updates automatically when new information such as news, earnings or revised analyst estimates is added.

For China Yuchai International, one investor might align with the higher analyst fair value of US$64.80, built on assumptions about revenue of CN¥33.8b, earnings of CN¥1.1b and a P/E of 20.3x. Another might sit closer to the lower US$45.00 view that uses revenue of CN¥33.7b, earnings of CN¥1.0b and a P/E of 14.2x. By setting up your own Narrative alongside these, you can see in a single place whether your fair value sits above or below the current price and how that might inform your future buy or sell decisions.

Do you think there's more to the story for China Yuchai International? Head over to our Community to see what others are saying!

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.