Wenzhou Hongfeng Electrical Alloy's (SZSE:300283 one-year decrease in earnings delivers investors with a 21% loss

Passive investing in an index fund is a good way to ensure your own returns roughly match the overall market. But if you buy individual stocks, you can do both better or worse than that. That downside risk was realized by Wenzhou Hongfeng Electrical Alloy Co., Ltd. (SZSE:300283) shareholders over the last year, as the share price declined 21%. That falls noticeably short of the market decline of around 9.6%. Looking at the longer term, the stock is down 18% over three years. And the share price decline continued over the last week, dropping some 12%.

Since Wenzhou Hongfeng Electrical Alloy has shed CN¥249m from its value in the past 7 days, let's see if the longer term decline has been driven by the business' economics.

View our latest analysis for Wenzhou Hongfeng Electrical Alloy

We don't think that Wenzhou Hongfeng Electrical Alloy's modest trailing twelve month profit has the market's full attention at the moment. We think revenue is probably a better guide. As a general rule, we think this kind of company is more comparable to loss-making stocks, since the actual profit is so low. It would be hard to believe in a more profitable future without growing revenues.

In the last twelve months, Wenzhou Hongfeng Electrical Alloy increased its revenue by 31%. We think that is pretty nice growth. Meanwhile, the share price is down 21% over twelve months, which is disappointing given the progress made. This implies the market was expecting better growth. But if revenue keeps growing, then at a certain point the share price would likely follow.

The company's revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).

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.

A Different Perspective

While the broader market lost about 9.6% in the twelve months, Wenzhou Hongfeng Electrical Alloy shareholders did even worse, losing 21% (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 3% 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. 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. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Wenzhou Hongfeng Electrical Alloy (of which 2 can't be ignored!) you should know about.

For those who like to find winning investments this free list of undervalued companies with recent insider purchasing, could be just the ticket.

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

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

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.