In order to justify the effort of selecting individual stocks, it's worth striving to beat the returns from a market index fund. But the risk of stock picking is that you will likely buy under-performing companies. Unfortunately, that's been the case for longer term Hunan Er-Kang Pharmaceutical Co., Ltd (SZSE:300267) shareholders, since the share price is down 27% in the last three years, falling well short of the market decline of around 15%.

Since Hunan Er-Kang Pharmaceutical has shed CN¥371m 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 Hunan Er-Kang Pharmaceutical

We don't think that Hunan Er-Kang Pharmaceutical's modest trailing twelve month profit has the market's full attention at the moment. We think revenue is probably a better guide. As a general rule, we think this kind of company is more comparable to loss-making stocks, since the actual profit is so low. For shareholders to have confidence a company will grow profits significantly, it must grow revenue.

In the last three years Hunan Er-Kang Pharmaceutical saw its revenue shrink by 7.4% per year. That is not a good result. The stock has disappointed holders over the last three years, falling 8%, annualized. And with no profits, and weak revenue, are you surprised? Of course, sentiment could become too negative, and the company may actually be making progress to profitability.

You can see how earnings and revenue have changed over time in the image below (click on the chart to see the exact values).

We're pleased to report that the CEO is remunerated more modestly than most CEOs at similarly capitalized companies. But while CEO remuneration is always worth checking, the really important question is whether the company can grow earnings going forward. It might be well worthwhile taking a look at our free report on Hunan Er-Kang Pharmaceutical's earnings, revenue and cash flow.

A Different Perspective

We regret to report that Hunan Er-Kang Pharmaceutical shareholders are down 16% for the year (even including dividends). Unfortunately, that's worse than the broader market decline of 9.3%. 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. It's always interesting to track share price performance over the longer term. But to understand Hunan Er-Kang Pharmaceutical better, we need to consider many other factors. For instance, we've identified 3 warning signs for Hunan Er-Kang Pharmaceutical (2 are concerning) that you should be aware of.

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 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.