Passive investing in an index fund is a good way to ensure your own returns roughly match the overall market. But if you buy individual stocks, you can do both better or worse than that. Investors in Guangdong Chaohua Technology Co., Ltd (SZSE:002288) have tasted that bitter downside in the last year, as the share price dropped 17%. That contrasts poorly with the market decline of 2.6%. At least the damage isn't so bad if you look at the last three years, since the stock is down 6.2% in that time. Furthermore, it's down 17% in about a quarter. That's not much fun for holders.

Since Guangdong Chaohua Technology has shed CN¥419m from its value in the past 7 days, let's see if the longer term decline has been driven by the business' economics.

View our latest analysis for Guangdong Chaohua Technology

Because Guangdong Chaohua Technology made a loss in the last twelve months, we think the market is probably more focussed on revenue and revenue growth, at least for now. Shareholders of unprofitable companies usually expect strong revenue growth. Some companies are willing to postpone profitability to grow revenue faster, but in that case one does expect good top-line growth.

In just one year Guangdong Chaohua Technology saw its revenue fall by 44%. That looks pretty grim, at a glance. The stock price has languished lately, falling 17% in a year. What would you expect when revenue is falling, and it doesn't make a profit? We think most holders must believe revenue growth will improve, or else costs will decline.

The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).

This free interactive report on Guangdong Chaohua Technology'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 2.6% in the twelve months, Guangdong Chaohua Technology shareholders did even worse, losing 17%. However, it could simply be that the share price has been impacted by broader market jitters. It might be worth keeping an eye on the fundamentals, in case there's a good opportunity. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 3% per year over five years. 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. 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. To that end, you should be aware of the 2 warning signs we've spotted with Guangdong Chaohua Technology .

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 Chinese 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.