If You Had Bought Guangzhou Rural Commercial Bank's (HKG:1551) Shares Three Years Ago You Would Be Down 49%

As an investor its worth striving to ensure your overall portfolio beats the market average. But the risk of stock picking is that you will likely buy under-performing companies. We regret to report that long term Guangzhou Rural Commercial Bank Co., Ltd. (HKG:1551) shareholders have had that experience, with the share price dropping 49% in three years, versus a market decline of about 3.7%. And the share price decline continued over the last week, dropping some 10.0%.

See our latest analysis for Guangzhou Rural Commercial Bank

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.

During the unfortunate three years of share price decline, Guangzhou Rural Commercial Bank actually saw its earnings per share (EPS) improve by 1.6% 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. But it's possible a look at other metrics will be enlightening.

We note that the dividend seems healthy enough, so that probably doesn't explain the share price drop. Guangzhou Rural Commercial Bank has maintained its top line over three years, so we doubt that has shareholders worried. A closer look at revenue and profit trends might yield insights.

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

We're pleased to report that the CEO is remunerated more modestly than most CEOs at similarly capitalized companies. It's always worth keeping an eye on CEO pay, but a more important question is whether the company will grow earnings throughout the years. It might be well worthwhile taking a look at our free report on Guangzhou Rural Commercial Bank'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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. As it happens, Guangzhou Rural Commercial Bank's TSR for the last 3 years was -40%, which exceeds the share price return mentioned earlier. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

Guangzhou Rural Commercial Bank shareholders are down 9.1% for the year, (even including dividends), but the broader market is up 9.4%. Of course the long term matters more than the short term, and even great stocks will sometimes have a poor year. Unfortunately, the longer term story isn't pretty, with investment losses running at 12% per year over three years. We would want clear information suggesting the company will grow, before taking the view that the share price will stabilize. It's always interesting to track share price performance over the longer term. But to understand Guangzhou Rural Commercial Bank better, we need to consider many other factors. To that end, you should be aware of the 1 warning sign we've spotted with Guangzhou Rural Commercial Bank .

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

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This article by Simply Wall St is general in nature. 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.
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