Zhejiang Jiahua Energy Chemical IndustryLtd (SHSE:600273) stock falls 4.3% in past week as five-year earnings and shareholder returns continue downward trend

The main aim of stock picking is to find the market-beating stocks. But even the best stock picker will only win with some selections. At this point some shareholders may be questioning their investment in Zhejiang Jiahua Energy Chemical Industry Co.,Ltd. (SHSE:600273), since the last five years saw the share price fall 40%. Shareholders have had an even rougher run lately, with the share price down 14% in the last 90 days. Of course, this share price action may well have been influenced by the 5.9% decline in the broader market, throughout the period.

If the past week is anything to go by, investor sentiment for Zhejiang Jiahua Energy Chemical IndustryLtd isn't positive, so let's see if there's a mismatch between fundamentals and the share price.

View our latest analysis for Zhejiang Jiahua Energy Chemical IndustryLtd

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 way to examine how market sentiment has changed over time is to look at the interaction between a company's share price and its earnings per share (EPS).

Looking back five years, both Zhejiang Jiahua Energy Chemical IndustryLtd's share price and EPS declined; the latter at a rate of 1.4% per year. This reduction in EPS is less than the 10% annual reduction in the share price. This implies that the market was previously too optimistic about the stock. The less favorable sentiment is reflected in its current P/E ratio of 9.50.

The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).

Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here.

What About Dividends?

When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. 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. In the case of Zhejiang Jiahua Energy Chemical IndustryLtd, it has a TSR of -23% for the last 5 years. That exceeds its share price return that we previously mentioned. This is largely a result of its dividend payments!

A Different Perspective

While the broader market lost about 14% in the twelve months, Zhejiang Jiahua Energy Chemical IndustryLtd shareholders did even worse, losing 17% (even including dividends). Having said that, it's inevitable that some stocks will be oversold in a falling market. The key is to keep your eyes on the fundamental developments. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 4% over the last half decade. We realise that Baron Rothschild has said investors should "buy when there is blood on the streets", but we caution that investors should first be sure they are buying a high quality business. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Zhejiang Jiahua Energy Chemical IndustryLtd , and understanding them should be part of your investment process.

If you would prefer to check out another company -- one with potentially superior financials -- then do not miss this free list of companies that have proven they can grow earnings.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on Chinese exchanges.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com