The five-year shareholder returns and company earnings persist lower as Perfect World (SZSE:002624) stock falls a further 3.8% in past week

Statistically speaking, long term investing is a profitable endeavour. But that doesn't mean long term investors can avoid big losses. For example the Perfect World Co., Ltd. (SZSE:002624) share price dropped 59% over five years. That's not a lot of fun for true believers. And it's not just long term holders hurting, because the stock is down 46% in the last year. The falls have accelerated recently, with the share price down 23% in the last three months. But this could be related to the weak market, which is down 12% in the same period.

After losing 3.8% this past week, it's worth investigating the company's fundamentals to see what we can infer from past performance.

Check out our latest analysis for Perfect World

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 imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.

Looking back five years, both Perfect World's share price and EPS declined; the latter at a rate of 35% per year. The share price decline of 16% per year isn't as bad as the EPS decline. So the market may previously have expected a drop, or else it expects the situation will improve. The high P/E ratio of 68.54 suggests that shareholders believe earnings will grow in the years ahead.

You can see below how EPS has changed over time (discover the exact values by clicking on the image).

Dive deeper into Perfect World's key metrics by checking this interactive graph of Perfect World's earnings, revenue and cash flow.

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 incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. As it happens, Perfect World's TSR for the last 5 years was -52%, which exceeds the share price return mentioned earlier. The dividends paid by the company have thusly boosted the total shareholder return.

A Different Perspective

While the broader market lost about 18% in the twelve months, Perfect World shareholders did even worse, losing 44% (even including dividends). However, it could simply be that the share price has been impacted by broader market jitters. It might be worth keeping an eye on the fundamentals, in case there's a good opportunity. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 9% over the last half decade. Generally speaking long term share price weakness can be a bad sign, though contrarian investors might want to research the stock in hope of a turnaround. It's always interesting to track share price performance over the longer term. But to understand Perfect World better, we need to consider many other factors. Case in point: We've spotted 3 warning signs for Perfect World you should be aware of, and 1 of them is significant.

We will like Perfect World better if we see some big insider buys. While we wait, check out this free list of undervalued stocks (mostly small caps) with considerable, recent, insider buying.

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.