Sinopec Oilfield Service (HKG:1033) sheds 4.4% this week, as yearly returns fall more in line with earnings growth

Passive investing in index funds can generate returns that roughly match the overall market. But one can do better than that by picking better than average stocks (as part of a diversified portfolio). For example, the Sinopec Oilfield Service Corporation (HKG:1033) share price is up 40% in the last 1 year, clearly besting the market return of around 22% (not including dividends). So that should have shareholders smiling. Unfortunately the longer term returns are not so good, with the stock falling 1.5% in the last three years.

In light of the stock dropping 4.4% in the past week, we want to investigate the longer term story, and see if fundamentals have been the driver of the company's positive one-year return.

Check out our latest analysis for Sinopec Oilfield Service

While the efficient markets hypothesis continues to be taught by some, it has been proven that markets are over-reactive dynamic systems, and investors are not always rational. 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.

Sinopec Oilfield Service was able to grow EPS by 34% in the last twelve months. This EPS growth is reasonably close to the 40% increase in the share price. That suggests that the market sentiment around the company hasn't changed much over that time. It makes intuitive sense that the share price and EPS would grow at similar rates.

The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).

It is of course excellent to see how Sinopec Oilfield Service has grown profits over the years, but the future is more important for shareholders. It might be well worthwhile taking a look at our free report on how its financial position has changed over time.

A Different Perspective

It's nice to see that Sinopec Oilfield Service shareholders have received a total shareholder return of 40% over the last year. There's no doubt those recent returns are much better than the TSR loss of 4% per year over five years. We generally put more weight on the long term performance over the short term, but the recent improvement could hint at a (positive) inflection point within the business. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Sinopec Oilfield Service (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

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.