In order to justify the effort of selecting individual stocks, it's worth striving to beat the returns from a market index fund. But every investor is virtually certain to have both over-performing and under-performing stocks. So we wouldn't blame long term China Ecotek Corporation (TPE:1535) shareholders for doubting their decision to hold, with the stock down 45% over a half decade. There was little comfort for shareholders in the last week as the price declined a further 4.7%.
In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.
During the five years over which the share price declined, China Ecotek's earnings per share (EPS) dropped by 26% each year. The share price decline of 11% per year isn't as bad as the EPS decline. The relatively muted share price reaction might be because the market expects the business to turn around.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
This free interactive report on China Ecotek'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. The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for China Ecotek the TSR over the last 5 years was -33%, which is better than the share price return mentioned above. And there's no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
China Ecotek shareholders are down 3.9% for the year (even including dividends), but the market itself is up 18%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Unfortunately, longer term shareholders are suffering worse, given the loss of 6% doled out over the last five years. We would want clear information suggesting the company will grow, before taking the view that the share price will stabilize. It's always interesting to track share price performance over the longer term. But to understand China Ecotek 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 China Ecotek (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.
We will like China Ecotek better if we see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on TW exchanges.
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This article by Simply Wall St is general in nature. 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.
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