Pulling back 10% this week, Able Engineering Holdings' HKG:1627) five-year decline in earnings may be coming into investors focus

It's possible to achieve returns close to the market-weighted average return by buying an index fund. A talented investor can beat the market with a diversified portfolio, but even then, some stocks will under-perform. While the Able Engineering Holdings Limited (HKG:1627) share price is down 27% over half a decade, the total return to shareholders (which includes dividends) was 5.6%. And that total return actually beats the market decline of 1.6%. The falls have accelerated recently, with the share price down 15% in the last three months.

With the stock having lost 10% in the past week, it's worth taking a look at business performance and seeing if there's any red flags.

See our latest analysis for Able Engineering Holdings

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 Able Engineering Holdings' share price and EPS declined; the latter at a rate of 0.1% per year. Readers should note that the share price has fallen faster than the EPS, at a rate of 6% per year, over the period. So it seems the market was too confident about the business, in the past. The low P/E ratio of 4.08 further reflects this reticence.

You can see how EPS has changed over time in the image below (click on the chart to see the exact values).

Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here.

What About Dividends?

When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. Whereas the share price return only reflects the change in the share price, the TSR includes the value of dividends (assuming they were reinvested) and the benefit of any discounted capital raising or spin-off. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. As it happens, Able Engineering Holdings' TSR for the last 5 years was 5.6%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!

A Different Perspective

It's good to see that Able Engineering Holdings has rewarded shareholders with a total shareholder return of 27% in the last twelve months. Of course, that includes the dividend. Since the one-year TSR is better than the five-year TSR (the latter coming in at 1.1% per year), it would seem that the stock's performance has improved in recent times. In the best case scenario, this may hint at some real business momentum, implying that now could be a great time to delve deeper. 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. Take risks, for example - Able Engineering Holdings has 3 warning signs (and 1 which is potentially serious) we think you should know about.

For those who like to find winning investments this free list of growing 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 Hong Kong 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.