Many investors define successful investing as beating the market average over the long term. But the risk of stock picking is that you will likely buy under-performing companies. Unfortunately, that’s been the case for longer term Tsaker Chemical Group Limited (HKG:1986) shareholders, since the share price is down 42% in the last three years, falling well short of the market return of around 14%. On top of that, the share price is down 11% in the last week. But this could be related to the soft market, which is down about 4.7% in the same period.
In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. One flawed but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.
During the unfortunate three years of share price decline, Tsaker Chemical Group actually saw its earnings per share (EPS) improve by 66% per year. Given the share price reaction, one might suspect that EPS is not a good guide to the business performance during the period (perhaps due to a one-off loss or gain). Alternatively, growth expectations may have been unreasonable in the past.
It’s worth taking a look at other metrics, because the EPS growth doesn’t seem to match with the falling share price.
We note that the dividend seems healthy enough, so that probably doesn’t explain the share price drop. It’s good to see that Tsaker Chemical Group has increased its revenue over the last three years. If the company can keep growing revenue, there may be an opportunity for investors. You might have to dig deeper to understand the recent share price weakness.
The graphic below depicts how earnings and revenue have changed over time (unveil the exact values by clicking on the image).
Balance sheet strength is crucial. It might be well worthwhile taking a look at our free report on how its financial position has changed over time.
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). The TSR is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. As it happens, Tsaker Chemical Group’s TSR for the last 3 years was -40%, which exceeds the share price return mentioned earlier. And there’s no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
It’s nice to see that Tsaker Chemical Group shareholders have gained 14% (in total) over the last year. That’s including the dividend. That certainly beats the loss of about 16% per year over three years. We’re generally cautious about putting too much weigh on shorter term data, but the recent improvement is definitely a positive. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. For example, we’ve discovered 2 warning signs for Tsaker Chemical Group that you should be aware of before investing here.
But note: Tsaker Chemical Group may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on HK exchanges.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned.
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