Earnings growth of 6.9% over 3 years hasn't been enough to translate into positive returns for Li Ning (HKG:2331) shareholders

Investing in stocks inevitably means buying into some companies that perform poorly. But the last three years have been particularly tough on longer term Li Ning Company Limited (HKG:2331) shareholders. Sadly for them, the share price is down 70% in that time. The more recent news is of little comfort, with the share price down 49% in a year. The last week also saw the share price slip down another 6.8%. But this could be related to the soft market, which is down about 3.1% in the same period.

Since Li Ning has shed HK$4.1b 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 Li Ning

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, Li Ning actually saw its earnings per share (EPS) improve by 22% per year. This is quite a puzzle, and suggests there might be something temporarily buoying the share price. Or else the company was over-hyped in the past, and so its growth has disappointed.

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

We note that, in three years, revenue has actually grown at a 19% annual rate, so that doesn't seem to be a reason to sell shares. It's probably worth investigating Li Ning further; while we may be missing something on this analysis, there might also be an opportunity.

The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).

Li Ning is a well known stock, with plenty of analyst coverage, suggesting some visibility into future growth. So it makes a lot of sense to check out what analysts think Li Ning will earn in the future (free analyst consensus estimates)

A Different Perspective

Investors in Li Ning had a tough year, with a total loss of 48% (including dividends), against a market gain of about 7.7%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Longer term investors wouldn't be so upset, since they would have made 12%, each year, over five years. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. Is Li Ning cheap compared to other companies? These 3 valuation measures might help you decide.

If you are like me, then you will not want to miss this free list of undervalued small caps that insiders are buying.

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.