Volatility 101: Should Zhengzhou Coal Mining Machinery Group (HKG:564) Shares Have Dropped 14%?

The main aim of stock picking is to find the market-beating stocks. But in any portfolio, there will be mixed results between individual stocks. So we wouldn’t blame long term Zhengzhou Coal Mining Machinery Group Company Limited (HKG:564) shareholders for doubting their decision to hold, with the stock down 14% over a half decade.

View our latest analysis for Zhengzhou Coal Mining Machinery Group

While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. 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 Zhengzhou Coal Mining Machinery Group’s share price and EPS declined; the latter at a rate of 2.0% per year. This reduction in EPS is less than the 3.0% annual reduction in the share price. This implies that the market was previously too optimistic about the stock. The low P/E ratio of 6.77 further reflects this reticence.

The company’s earnings per share (over time) is depicted in the image below (click to see the exact numbers).

SEHK:564 Past and Future Earnings, March 29th 2019
SEHK:564 Past and Future Earnings, March 29th 2019

It is of course excellent to see how Zhengzhou Coal Mining Machinery Group has grown profits over the years, but the future is more important for shareholders. Take a more thorough look at Zhengzhou Coal Mining Machinery Group’s financial health with this free report on its balance sheet.

What About Dividends?

As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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, Zhengzhou Coal Mining Machinery Group’s TSR for the last 5 years was -7.7%, which exceeds the share price return mentioned earlier. The dividends paid by the company have thusly boosted the total shareholder return.

A Different Perspective

We regret to report that Zhengzhou Coal Mining Machinery Group shareholders are down 9.0% for the year (even including dividends). Unfortunately, that’s worse than the broader market decline of 4.8%. 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. Regrettably, last year’s performance caps off a bad run, with the shareholders facing a total loss of 1.6% per year over five years. We realise that Buffett has said investors should ‘buy when there is blood on the streets’, but we caution that investors should first be sure they are buying a high quality businesses. Before deciding if you like the current share price, check how Zhengzhou Coal Mining Machinery Group scores on these 3 valuation metrics.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies we expect will grow earnings.

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

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.