Some stocks are best avoided. We really hate to see fellow investors lose their hard-earned money. Spare a thought for those who held Zhongyuan Bank Co., Ltd. (HKG:1216) for five whole years - as the share price tanked 74%. On the other hand the share price has bounced 5.1% over the last week. The buoyant market could have helped drive the share price pop, since stocks are up 7.8% in the same period.

Although the past week has been more reassuring for shareholders, they're still in the red over the last five years, so let's see if the underlying business has been responsible for the decline.

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 five years over which the share price declined, Zhongyuan Bank's earnings per share (EPS) dropped by 13% each year. This reduction in EPS is less than the 23% annual reduction in the share price. So it seems the market was too confident about the business, in the past. The low P/E ratio of 4.16 further reflects this reticence.

The company's earnings per share (over time) is depicted in the image below (click to see the exact numbers).

This free interactive report on Zhongyuan Bank's earnings, revenue and cash flow is a great place to start, if you want to investigate the stock further.

A Different Perspective

While the broader market gained around 14% in the last year, Zhongyuan Bank shareholders lost 13%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. However, the loss over the last year isn't as bad as the 12% per annum loss investors have suffered over the last half decade. We would want clear information suggesting the company will grow, before taking the view that the share price will stabilize. 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 Zhongyuan Bank (at least 1 which is concerning) , 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 Hong Kong exchanges.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.