The three-year decline in earnings might be taking its toll on China Literature (HKG:772) shareholders as stock falls 6.7% over the past week

While China Literature Limited (HKG:772) shareholders are probably generally happy, the stock hasn't had particularly good run recently, with the share price falling 13% in the last quarter. On the other hand the share price is higher than it was three years ago. However, it's unlikely many shareholders are elated with the share price gain of 44% over that time, given the rising market.

In light of the stock dropping 6.7% 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 three-year return.

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In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. 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.

Over the last three years, China Literature failed to grow earnings per share, which fell 49% (annualized).

This means it's unlikely the market is judging the company based on earnings growth. Given this situation, it makes sense to look at other metrics too.

The revenue drop of 0.8% is as underwhelming as some politicians. The only thing that's clear is there is low correlation between China Literature's share price and its historic fundamental data. Further research may be required!

The graphic below depicts how earnings and revenue have changed over time (unveil the exact values by clicking on the image).

China Literature is a well known stock, with plenty of analyst coverage, suggesting some visibility into future growth. So we recommend checking out this free report showing consensus forecasts

A Different Perspective

China Literature's TSR for the year was broadly in line with the market average, at 43%. To take a positive view, the gain is pleasing, and it sure beats annualized TSR loss of 7%, which was endured over half a decade. We're pretty skeptical of turnaround stories, but it's good to see the recent share price recovery. 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 3 warning signs for China Literature that you should be aware of before investing here.

We will like China Literature better if we see some big insider buys. While we wait, check out this free list of undervalued stocks (mostly small caps) with considerable, recent, insider 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.