Zhongyu Energy Holdings (HKG:3633) sheds HK$412m, company earnings and investor returns have been trending downwards for past five years

Ideally, your overall portfolio should beat the market average. But even the best stock picker will only win with some selections. So we wouldn't blame long term Zhongyu Energy Holdings Limited (HKG:3633) shareholders for doubting their decision to hold, with the stock down 45% over a half decade.

Since Zhongyu Energy Holdings has shed HK$412m from its value in the past 7 days, let's see if the longer term decline has been driven by the business' economics.

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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 way to examine how market sentiment has changed over time is to look at the interaction between a company's share price and its earnings per share (EPS).

During the five years over which the share price declined, Zhongyu Energy Holdings' earnings per share (EPS) dropped by 21% each year. The share price decline of 11% per year isn't as bad as the EPS decline. So the market may previously have expected a drop, or else it expects the situation will improve. The high P/E ratio of 76.04 suggests that shareholders believe earnings will grow in the years ahead.

You can see below how EPS has changed over time (discover the exact values by clicking on the image).

This free interactive report on Zhongyu Energy Holdings' 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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for Zhongyu Energy Holdings the TSR over the last 5 years was -42%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!

A Different Perspective

Zhongyu Energy Holdings shareholders are down 14% for the year (even including dividends), but the market itself is up 32%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 7% 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. 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 3 warning signs with Zhongyu Energy Holdings (at least 2 which are concerning) , and understanding them should be part of your investment process.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies we expect will grow earnings.

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.