Earnings growth of 1.5% over 3 years hasn't been enough to translate into positive returns for Zhejiang Huayou Cobalt (SHSE:603799) shareholders

As an investor, mistakes are inevitable. But you have a problem if you face massive losses more than once in a while. So consider, for a moment, the misfortune of Zhejiang Huayou Cobalt Co., Ltd (SHSE:603799) investors who have held the stock for three years as it declined a whopping 74%. That might cause some serious doubts about the merits of the initial decision to buy the stock, to put it mildly. The more recent news is of little comfort, with the share price down 43% in a year. The falls have accelerated recently, with the share price down 15% in the last three months. But this could be related to the weak market, which is down 12% in the same period.

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

See our latest analysis for Zhejiang Huayou Cobalt

While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. 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).

During the unfortunate three years of share price decline, Zhejiang Huayou Cobalt actually saw its earnings per share (EPS) improve by 4.6% per year. This is quite a puzzle, and suggests there might be something temporarily buoying the share price. Alternatively, growth expectations may have been unreasonable in the past.

After considering the numbers, we'd posit that the the market had higher expectations of EPS growth, three years back. Looking to other metrics might better explain the share price change.

Given the healthiness of the dividend payments, we doubt that they've concerned the market. We like that Zhejiang Huayou Cobalt has actually grown its revenue over the last three years. But it's not clear to us why the share price is down. It might be worth diving deeper into the fundamentals, lest an opportunity goes begging.

The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).

Zhejiang Huayou Cobalt is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. So we recommend checking out this free report showing consensus forecasts

A Different Perspective

While the broader market lost about 19% in the twelve months, Zhejiang Huayou Cobalt shareholders did even worse, losing 41% (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. On the bright side, long term shareholders have made money, with a gain of 1.8% per year over half a decade. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. 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 Zhejiang Huayou Cobalt (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: many of them are unnoticed AND have attractive valuation).

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.