Statistically speaking, long term investing is a profitable endeavour. But unfortunately, some companies simply don't succeed. Zooming in on an example, the Zuoli Kechuang Micro-finance Company Limited (HKG:6866) share price dropped 69% in the last half decade. That's an unpleasant experience for long term holders. And it's not just long term holders hurting, because the stock is down 26% in the last year. The silver lining is that the stock is up 1.5% in about a week.
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.
Looking back five years, both Zuoli Kechuang Micro-finance's share price and EPS declined; the latter at a rate of 2.8% per year. This reduction in EPS is less than the 21% annual reduction in the share price. This implies that the market was previously too optimistic about the stock. The less favorable sentiment is reflected in its current P/E ratio of 2.81.
The company's earnings per share (over time) is depicted in the image below (click to see the exact numbers).
It's probably worth noting that the CEO is paid less than the median at similar sized companies. But while CEO remuneration is always worth checking, the really important question is whether the company can grow earnings going forward. It might be well worthwhile taking a look at our free report on Zuoli Kechuang Micro-finance's earnings, revenue and cash flow.
What about the Total Shareholder Return (TSR)?
We'd be remiss not to mention the difference between Zuoli Kechuang Micro-finance's total shareholder return (TSR) and its share price return. Arguably the TSR is a more complete return calculation because it accounts for the value of dividends (as if they were reinvested), along with the hypothetical value of any discounted capital that have been offered to shareholders. Dividends have been really beneficial for Zuoli Kechuang Micro-finance shareholders, and that cash payout explains why its total shareholder loss of 55%, over the last 5 years, isn't as bad as the share price return.
A Different Perspective
Investors in Zuoli Kechuang Micro-finance had a tough year, with a total loss of 26%, against a market gain of about 10%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 9% per year over five years. We realise that Baron Rothschild 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 business. 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 - Zuoli Kechuang Micro-finance has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.
If you would prefer to check out another company -- one with potentially superior financials -- then do not miss this free list of companies that have proven they can 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.
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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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