Kunming Dianchi Water Treatment (HKG:3768) sheds HK$93m, company earnings and investor returns have been trending downwards for past five years

We think intelligent long term investing is the way to go. But no-one is immune from buying too high. For example the Kunming Dianchi Water Treatment Co., Ltd. (HKG:3768) share price dropped 71% over five years. We certainly feel for shareholders who bought near the top. We also note that the stock has performed poorly over the last year, with the share price down 52%. The falls have accelerated recently, with the share price down 23% in the last three months. We note that the company has reported results fairly recently; and the market is hardly delighted. You can check out the latest numbers in our company report.

Since Kunming Dianchi Water Treatment has shed HK$93m from its value in the past 7 days, let's see if the longer term decline has been driven by the business' economics.

See our latest analysis for Kunming Dianchi Water Treatment

There is no denying that markets are sometimes efficient, but prices do not always reflect 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 five years over which the share price declined, Kunming Dianchi Water Treatment's earnings per share (EPS) dropped by 0.5% each year. Readers should note that the share price has fallen faster than the EPS, at a rate of 22% per year, over the period. This implies that the market was previously too optimistic about the stock. The less favorable sentiment is reflected in its current P/E ratio of 1.95.

You can see how EPS has changed over time in the image below (click on the chart to see the exact values).

It's probably worth noting that the CEO is paid less than the median at similar sized companies. It's always worth keeping an eye on CEO pay, but a more important question is whether the company will grow earnings throughout the years. Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here..

What About The Total Shareholder Return (TSR)?

We'd be remiss not to mention the difference between Kunming Dianchi Water Treatment's total shareholder return (TSR) and its share price return. Arguably the TSR is a more complete return calculation because it accounts for the value of dividends (as if they were reinvested), along with the hypothetical value of any discounted capital that have been offered to shareholders. Dividends have been really beneficial for Kunming Dianchi Water Treatment shareholders, and that cash payout explains why its total shareholder loss of 58%, over the last 5 years, isn't as bad as the share price return.

A Different Perspective

Kunming Dianchi Water Treatment shareholders are down 52% for the year, but the market itself is up 10%. 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 10% over the last half decade. Generally speaking long term share price weakness can be a bad sign, though contrarian investors might want to research the stock in hope of a turnaround. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 5 warning signs with Kunming Dianchi Water Treatment (at least 2 which are significant) , and understanding them should be part of your investment process.

If you would prefer to check out another company -- one with potentially superior financials -- then do not miss this free list of companies that have proven they can 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.