Honghua Group Limited (HKG:196) shareholders should be happy to see the share price up 21% in the last quarter. But the last three years have seen a terrible decline. Indeed, the share price is down a whopping 74% in the last three years. Arguably, the recent bounce is to be expected after such a bad drop. The thing to think about is whether the business has really turned around.
There is no denying that markets are sometimes efficient, but prices do not always reflect 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.
During five years of share price growth, Honghua Group moved from a loss to profitability. That would generally be considered a positive, so we are surprised to see the share price is down. So given the share price is down it's worth checking some other metrics too.
We note that, in three years, revenue has actually grown at a 29% annual rate, so that doesn't seem to be a reason to sell shares. This analysis is just perfunctory, but it might be worth researching Honghua Group more closely, as sometimes stocks fall unfairly. This could present an opportunity.
You can see how earnings and revenue have changed over time in the image below (click on the chart to see the exact values).
We know that Honghua Group has improved its bottom line over the last three years, but what does the future have in store? This free interactive report on Honghua Group's balance sheet strength is a great place to start, if you want to investigate the stock further.
A Different Perspective
Honghua Group shareholders are down 46% for the year, but the market itself is up 22%. 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. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 5% over the last half decade. 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. 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. Like risks, for instance. Every company has them, and we've spotted 4 warning signs for Honghua Group (of which 1 can't be ignored!) you should know about.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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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