Investing in Meituan (HKG:3690) five years ago would have delivered you a 104% gain

When you buy a stock there is always a possibility that it could drop 100%. But on a lighter note, a good company can see its share price rise well over 100%. For example, the Meituan (HKG:3690) share price has soared 104% in the last half decade. Most would be very happy with that. It's also good to see the share price up 69% over the last quarter. The company reported its financial results recently; you can catch up on the latest numbers by reading our company report.

Now it's worth having a look at the company's fundamentals too, because that will help us determine if the long term shareholder return has matched the performance of the underlying business.

View our latest analysis for Meituan

While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.

During the last half decade, Meituan became profitable. That kind of transition can be an inflection point that justifies a strong share price gain, just as we have seen here. Given that the company made a profit three years ago, but not five years ago, it is worth looking at the share price returns over the last three years, too. In fact, the Meituan stock price is 54% lower in the last three years. Meanwhile, EPS is up 41% per year. So there seems to be a mismatch between the positive EPS growth and the change in the share price, which is down -23% per year.

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

It is of course excellent to see how Meituan has grown profits over the years, but the future is more important for shareholders. This free interactive report on Meituan's balance sheet strength is a great place to start, if you want to investigate the stock further.

A Different Perspective

Investors in Meituan had a tough year, with a total loss of 6.5%, against a market gain of about 6.9%. 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. On the bright side, long term shareholders have made money, with a gain of 15% per year over half a decade. 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. 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. For example, we've discovered 2 warning signs for Meituan that you should be aware of before investing here.

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 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.