These days it's easy to simply buy an index fund, and your returns should (roughly) match the market. But in any given year a good portion of stocks will fall short of that. For example, that's what happened with Ever Reach Group (Holdings) Company Limited (HKG:3616) over the last year - it's share price is down 34% versus a market decline of 26%. Longer term shareholders haven't suffered as badly, since the stock is down a comparatively less painful 20% in three years. Even worse, it's down 16% in about a month, which isn't fun at all. But this could be related to poor market conditions -- stocks are down 18% in the same time.
Since Ever Reach Group (Holdings) has shed CN¥132m from its value in the past 7 days, let's see if the longer term decline has been driven by the business' economics.
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...' 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.
Unfortunately Ever Reach Group (Holdings) reported an EPS drop of 0.6% for the last year. This reduction in EPS is not as bad as the 34% share price fall. So it seems the market was too confident about the business, a year ago. The P/E ratio of 2.80 also points to the negative market sentiment.
The company's earnings per share (over time) is depicted in the image below (click to see the exact numbers).
This free interactive report on Ever Reach Group (Holdings)'s earnings, revenue and cash flow is a great place to start, if you want to investigate the stock further.
What About Dividends?
When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. Whereas the share price return only reflects the change in the share price, the TSR includes the value of dividends (assuming they were reinvested) and the benefit of any discounted capital raising or spin-off. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. As it happens, Ever Reach Group (Holdings)'s TSR for the last 1 year was -31%, which exceeds the share price return mentioned earlier. And there's no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
The last twelve months weren't great for Ever Reach Group (Holdings) shares, which performed worse than the market, costing holders 31%, including dividends. The market shed around 26%, no doubt weighing on the stock price. Shareholders have lost 4% per year over the last three years, so the share price drop has become steeper, over the last year; a potential symptom of as yet unsolved challenges. Although Baron Rothschild famously said to "buy when there's blood in the streets, even if the blood is your own", he also focusses on high quality stocks with solid prospects. It's always interesting to track share price performance over the longer term. But to understand Ever Reach Group (Holdings) better, we need to consider many other factors. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Ever Reach Group (Holdings) , and understanding them should be part of your investment process.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on HK exchanges.
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.