The three-year underlying earnings growth at Lingyi iTech (Guangdong) (SZSE:002600) is promising, but the shareholders are still in the red over that time

In order to justify the effort of selecting individual stocks, it's worth striving to beat the returns from a market index fund. But in any portfolio, there are likely to be some stocks that fall short of that benchmark. We regret to report that long term Lingyi iTech (Guangdong) Company (SZSE:002600) shareholders have had that experience, with the share price dropping 36% in three years, versus a market decline of about 15%.

Since Lingyi iTech (Guangdong) has shed CN¥2.1b from its value in the past 7 days, let's see if the longer term decline has been driven by the business' economics.

See our latest analysis for Lingyi iTech (Guangdong)

While the efficient markets hypothesis continues to be taught by some, it has been proven that markets are over-reactive dynamic systems, and investors are not always rational. 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.

Although the share price is down over three years, Lingyi iTech (Guangdong) actually managed to grow EPS by 21% per year in that time. 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.

It's worth taking a look at other metrics, because the EPS growth doesn't seem to match with the falling share price.

The modest 1.1% dividend yield is unlikely to be guiding the market view of the stock. We note that, in three years, revenue has actually grown at a 8.7% annual rate, so that doesn't seem to be a reason to sell shares. This analysis is just perfunctory, but it might be worth researching Lingyi iTech (Guangdong) more closely, as sometimes stocks fall unfairly. This could present an opportunity.

The graphic below depicts how earnings and revenue have changed over time (unveil the exact values by clicking on the image).

We know that Lingyi iTech (Guangdong) has improved its bottom line lately, but what does the future have in store? So we recommend checking out this free report showing consensus forecasts

A Different Perspective

While it's certainly disappointing to see that Lingyi iTech (Guangdong) shares lost 13% throughout the year, that wasn't as bad as the market loss of 15%. Longer term investors wouldn't be so upset, since they would have made 0.2%, each year, over five years. In the best case scenario the last year is just a temporary blip on the journey to a brighter future. It's always interesting to track share price performance over the longer term. But to understand Lingyi iTech (Guangdong) better, we need to consider many other factors. Case in point: We've spotted 1 warning sign for Lingyi iTech (Guangdong) you should be aware of.

We will like Lingyi iTech (Guangdong) better if we see some big insider buys. While we wait, check out this free list of growing companies 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.