The past three years for China Literature (HKG:772) investors has not been profitable

While it may not be enough for some shareholders, we think it is good to see the China Literature Limited (HKG:772) share price up 17% in a single quarter. But that doesn't change the fact that the returns over the last three years have been disappointing. Tragically, the share price declined 70% in that time. So it's good to see it climbing back up. While many would remain nervous, there could be further gains if the business can put its best foot forward.

It's worthwhile assessing if the company's economics have been moving in lockstep with these underwhelming shareholder returns, or if there is some disparity between the two. So let's do just that.

Check out our latest analysis for China Literature

To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace...' 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 five years of share price growth, China Literature 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 think that the revenue decline over three years, at a rate of 11% per year, probably had some shareholders looking to sell. After all, if revenue keeps shrinking, it may be difficult to find earnings growth in the future.

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

We consider it positive that insiders have made significant purchases in the last year. Having said that, most people consider earnings and revenue growth trends to be a more meaningful guide to the business. You can see what analysts are predicting for China Literature in this interactive graph of future profit estimates.

A Different Perspective

Investors in China Literature had a tough year, with a total loss of 18%, against a market gain of about 6.4%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 3% 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. If you want to research this stock further, the data on insider buying is an obvious place to start. You can click here to see who has been buying shares - and the price they paid.

China Literature is not the only stock insiders are buying. So take a peek at this free list of small cap companies at attractive valuations which insiders have been 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.