YiChang HEC ChangJiang Pharmaceutical Co., Ltd. (HKG:1558) shareholders should be happy to see the share price up 12% in the last month. But that doesn't change the fact that the returns over the last three years have been disappointing. Tragically, the share price declined 55% in that time. So the improvement may be a real relief to some. While many would remain nervous, there could be further gains if the business can put its best foot forward.
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. One flawed but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.
During the unfortunate three years of share price decline, YiChang HEC ChangJiang Pharmaceutical actually saw its earnings per share (EPS) improve by 50% per year. Given the share price reaction, one might suspect that EPS is not a good guide to the business performance during the period (perhaps due to a one-off loss or gain). Alternatively, growth expectations may have been unreasonable in the past.
It's worth taking a look at other metrics, because the EPS growth doesn't seem to match with the falling share price.
We note that the dividend seems healthy enough, so that probably doesn't explain the share price drop. We like that YiChang HEC ChangJiang Pharmaceutical has actually grown its revenue over the last three years. But it's not clear to us why the share price is down. It might be worth diving deeper into the fundamentals, lest an opportunity goes begging.
The graphic below depicts how earnings and revenue have changed over time (unveil the exact values by clicking on the image).
We're pleased to report that the CEO is remunerated more modestly than most CEOs at similarly capitalized companies. It's always worth keeping an eye on CEO pay, but a more important question is whether the company will grow earnings throughout the years. So it makes a lot of sense to check out what analysts think YiChang HEC ChangJiang Pharmaceutical will earn in the future (free profit forecasts).
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. As it happens, YiChang HEC ChangJiang Pharmaceutical's TSR for the last 3 years was -51%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!
A Different Perspective
YiChang HEC ChangJiang Pharmaceutical shareholders are down 52% for the year (even including dividends), but the market itself is up 36%. 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. On the bright side, long term shareholders have made money, with a gain of 10% per year over half a decade. If the fundamental data continues to indicate long term sustainable growth, the current sell-off could be an opportunity worth considering. It's always interesting to track share price performance over the longer term. But to understand YiChang HEC ChangJiang Pharmaceutical better, we need to consider many other factors. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for YiChang HEC ChangJiang Pharmaceutical (of which 1 is a bit unpleasant!) you should know about.
Of course YiChang HEC ChangJiang Pharmaceutical may not be the best stock to buy. So you may wish to see this free collection of growth stocks.
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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