One simple way to benefit from the stock market is to buy an index fund. But if you buy good businesses at attractive prices, your portfolio returns could exceed the average market return. For example, the Hengdian Entertainment Co.,LTD (SHSE:603103) share price is up 14% in the last three years, clearly besting the market decline of around 30% (not including dividends). On the other hand, the returns haven't been quite so good recently, with shareholders up just 6.8%.
Although Hengdian EntertainmentLTD has shed CN¥615m from its market cap this week, let's take a look at its longer term fundamental trends and see if they've driven returns.
Check out our latest analysis for Hengdian EntertainmentLTD
We don't think that Hengdian EntertainmentLTD's modest trailing twelve month profit has the market's full attention at the moment. We think revenue is probably a better guide. Generally speaking, we'd consider a stock like this alongside loss-making companies, simply because the quantum of the profit is so low. It would be hard to believe in a more profitable future without growing revenues.
Over the last three years Hengdian EntertainmentLTD has grown its revenue at 4.4% annually. That's not a very high growth rate considering it doesn't make profits. The modest growth is probably broadly reflected in the share price, which is up 4%, per year over 3 years. The real question is when the business will generate profits, and how quickly they will grow. In this sort of situation it can be worth putting the stock on your watchlist. If it can become profitable, then even moderate revenue growth could grow profits quickly.
You can see below how earnings and revenue have changed over time (discover the exact values by clicking on the image).
We know that Hengdian EntertainmentLTD has improved its bottom line lately, but what does the future have in store? You can see what analysts are predicting for Hengdian EntertainmentLTD in this interactive graph of future profit estimates.
A Different Perspective
We're pleased to report that Hengdian EntertainmentLTD shareholders have received a total shareholder return of 6.8% over one year. That's better than the annualised return of 0.8% over half a decade, implying that the company is doing better recently. Someone with an optimistic perspective could view the recent improvement in TSR as indicating that the business itself is getting better with time. 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. Even so, be aware that Hengdian EntertainmentLTD is showing 2 warning signs in our investment analysis , you should know about...
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.