Positive earnings growth hasn't been enough to get Huaren Pharmaceutical (SZSE:300110) shareholders a favorable return over the last three years

Simply Wall St · 09/28 00:24

Huaren Pharmaceutical Co., Ltd. (SZSE:300110) shareholders should be happy to see the share price up 14% in the last week. It's not great that the stock is down over the last three years. But on the bright side, its return of -23%, is better than the market, which is down 24%.

The recent uptick of 14% could be a positive sign of things to come, so let's take a look at historical fundamentals.

See our latest analysis for Huaren Pharmaceutical

While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just 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 unfortunate three years of share price decline, Huaren Pharmaceutical actually saw its earnings per share (EPS) improve by 10% per year. Given the share price reaction, one might suspect that EPS is not a good guide to the business performance during the period (perhaps due to a one-off loss or gain). Or else the company was over-hyped in the past, and so its growth has disappointed.

It's worth taking a look at other metrics, because the EPS growth doesn't seem to match with the falling share price.

The modest 0.7% dividend yield is unlikely to be guiding the market view of the stock. The company has kept revenue pretty healthy over the last three years, so we doubt that explains the falling share price. There doesn't seem to be any clear correlation between the fundamental business metrics and the share price. That could mean that the stock was previously overrated, or it could spell opportunity now.

The graphic below depicts how earnings and revenue have changed over time (unveil the exact values by clicking on the image).

earnings-and-revenue-growth
SZSE:300110 Earnings and Revenue Growth September 28th 2024

This free interactive report on Huaren Pharmaceutical's balance sheet strength is a great place to start, if you want to investigate the stock further.

A Different Perspective

While the broader market lost about 10% in the twelve months, Huaren Pharmaceutical shareholders did even worse, losing 22% (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. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 3% per year over five years. 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. 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. To that end, you should be aware of the 1 warning sign we've spotted with Huaren Pharmaceutical .

For those who like to find winning investments this free list of undervalued companies with recent insider purchasing, could be just the ticket.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on Chinese exchanges.