If you are building a properly diversified stock portfolio, the chances are some of your picks will perform badly. But long term Tong Ren Tang Technologies Co. Ltd. (HKG:1666) shareholders have had a particularly rough ride in the last three year. Regrettably, they have had to cope with a 61% drop in the share price over that period. And the ride hasn't got any smoother in recent times over the last year, with the price 36% lower in that time. There was little comfort for shareholders in the last week as the price declined a further 3.8%.
While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. 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.
Tong Ren Tang Technologies saw its EPS decline at a compound rate of 19% per year, over the last three years. The share price decline of 27% is actually steeper than the EPS slippage. So it's likely that the EPS decline has disappointed the market, leaving investors hesitant to buy.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here.
What About Dividends?
It is important to consider the total shareholder return, as well as the share price return, for any given stock. The TSR is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. In the case of Tong Ren Tang Technologies, it has a TSR of -58% for the last 3 years. That exceeds its share price return that we previously mentioned. This is largely a result of its dividend payments!
A Different Perspective
Investors in Tong Ren Tang Technologies had a tough year, with a total loss of 34% (including dividends), against a market gain of about 12%. 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 9% 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. 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. Case in point: We've spotted 1 warning sign for Tong Ren Tang Technologies you should be aware of.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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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