China MeiDong Auto Holdings' (HKG:1268) earnings trajectory could turn positive as the stock rallies 20% this past week

It's nice to see the China MeiDong Auto Holdings Limited (HKG:1268) share price up 20% in a week. But only the myopic could ignore the astounding decline over three years. To wit, the share price sky-dived 86% in that time. Arguably, the recent bounce is to be expected after such a bad drop. Only time will tell if the company can sustain the turnaround. While a drop like that is definitely a body blow, money isn't as important as health and happiness.

On a more encouraging note the company has added HK$956m to its market cap in just the last 7 days, so let's see if we can determine what's driven the three-year loss for shareholders.

See our latest analysis for China MeiDong Auto Holdings

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.

China MeiDong Auto Holdings saw its EPS decline at a compound rate of 33% per year, over the last three years. This reduction in EPS is slower than the 48% annual reduction in the share price. 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).

It's probably worth noting we've seen significant insider buying in the last quarter, which we consider a positive. On the other hand, we think the revenue and earnings trends are much more meaningful measures of the business. Dive deeper into the earnings by checking this interactive graph of China MeiDong Auto Holdings' earnings, revenue and cash flow.

A Different Perspective

While the broader market lost about 8.8% in the twelve months, China MeiDong Auto Holdings shareholders did even worse, losing 74% (even including dividends). Having said that, it's inevitable that some stocks will be oversold in a falling market. The key is to keep your eyes on the fundamental developments. On the bright side, long term shareholders have made money, with a gain of 11% per year over half a decade. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. 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. Take risks, for example - China MeiDong Auto Holdings has 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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 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.