Earnings growth of 1.3% over 3 years hasn't been enough to translate into positive returns for Zhongzhi Pharmaceutical Holdings (HKG:3737) shareholders

No-one enjoys it when they lose money on a stock. But no-one can make money on every call, especially in a declining market. The Zhongzhi Pharmaceutical Holdings Limited (HKG:3737) is down 27% over three years, but the total shareholder return is -15% once you include the dividend. That's better than the market which declined 18% over the last three years. The falls have accelerated recently, with the share price down 19% in the last three months.

With the stock having lost 10% in the past week, it's worth taking a look at business performance and seeing if there's any red flags.

View our latest analysis for Zhongzhi Pharmaceutical Holdings

While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just 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 the unfortunate three years of share price decline, Zhongzhi Pharmaceutical Holdings actually saw its earnings per share (EPS) improve by 4.1% 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). Or else the company was over-hyped in the past, and so its growth has disappointed.

It looks to us like the market was probably too optimistic around growth three years ago. However, taking a look at other business metrics might shed a bit more light on the share price action.

We note that the dividend has declined - a likely contributor to the share price drop. In contrast it does not seem particularly likely that the revenue levels are a concern for investors.

The company's revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).

It's good to see that there was some significant insider buying in the last three months. That's a positive. That said, we think earnings and revenue growth trends are even more important factors to consider. It might be well worthwhile taking a look at our free report on Zhongzhi Pharmaceutical Holdings' earnings, revenue and cash flow.

What About Dividends?

When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. 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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. In the case of Zhongzhi Pharmaceutical Holdings, it has a TSR of -15% for the last 3 years. That exceeds its share price return that we previously mentioned. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

It's nice to see that Zhongzhi Pharmaceutical Holdings shareholders have received a total shareholder return of 13% over the last year. That's including the dividend. That certainly beats the loss of about 1.1% per year over the last half decade. We generally put more weight on the long term performance over the short term, but the recent improvement could hint at a (positive) inflection point within the 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. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Zhongzhi Pharmaceutical Holdings (at least 1 which is concerning) , and understanding them should be part of your investment process.

Zhongzhi Pharmaceutical Holdings 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.