This week we saw the Shanghai Sinotec Co., Ltd. (SHSE:603121) share price climb by 16%. But if you look at the last five years the returns have not been good. You would have done a lot better buying an index fund, since the stock has dropped 35% in that half decade.
On a more encouraging note the company has added CN¥379m to its market cap in just the last 7 days, so let's see if we can determine what's driven the five-year loss for shareholders.
To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace...' One way to examine how market sentiment has changed over time is to look at the interaction between a company's share price and its earnings per share (EPS).
Looking back five years, both Shanghai Sinotec's share price and EPS declined; the latter at a rate of 5.8% per year. This reduction in EPS is less than the 8% annual reduction in the share price. This implies that the market was previously too optimistic about the stock.
The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).
Dive deeper into Shanghai Sinotec's key metrics by checking this interactive graph of Shanghai Sinotec's earnings, revenue and cash flow.
What About The Total Shareholder Return (TSR)?
We've already covered Shanghai Sinotec's share price action, but we should also mention its total shareholder return (TSR). The TSR attempts to capture the value of dividends (as if they were reinvested) as well as any spin-offs or discounted capital raisings offered to shareholders. Its history of dividend payouts mean that Shanghai Sinotec's TSR, which was a 31% drop over the last 5 years, was not as bad as the share price return.
A Different Perspective
It's nice to see that Shanghai Sinotec shareholders have received a total shareholder return of 18% over the last year. There's no doubt those recent returns are much better than the TSR loss of 6% per year over five years. The long term loss makes us cautious, but the short term TSR gain certainly hints at a brighter future. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Shanghai Sinotec (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.
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.