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China Foods (HKG:506) sheds 5.5% this week, as yearly returns fall more in line with earnings growth

Simply Wall St ·  {{timeTz}}

Ideally, your overall portfolio should beat the market average. But if you pick the right individual stocks, you could make more -- or less -- than that. The China Foods Limited (HKG:506) stock price is down 17% over five years, but the total shareholder return is 16% once you include the dividend. That's better than the market which declined 11% over the same time.

Since China Foods has shed CN¥420m from its value in the past 7 days, let's see if the longer term decline has been driven by the business' economics.

Check out our latest analysis for China Foods

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...' By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.

While the share price declined over five years, China Foods actually managed to increase EPS by an average of 16% per year. So it doesn't seem like EPS is a great guide to understanding how the market is valuing the stock. Or possibly, the market was previously very optimistic, so the stock has disappointed, despite improving EPS.

Generally speaking we'd expect to see stronger share price increases on the back of sustained EPS growth, but other metrics may hold a clue to why the share price performance is relatively modest.

We note that the dividend has remained healthy, so that wouldn't really explain the share price drop. While it's not completely obvious why the share price is down, a closer look at the company's history might help explain it.

The graphic below depicts how earnings and revenue have changed over time (unveil the exact values by clicking on the image).

SEHK:506 Earnings and Revenue Growth June 15th 2022

We know that China Foods has improved its bottom line lately, but what does the future have in store? So it makes a lot of sense to check out what analysts think China Foods will earn in the future (free profit forecasts).

What About Dividends?

It is important to consider the total shareholder return, as well as the share price return, for any given stock. The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. As it happens, China Foods' TSR for the last 5 years was 16%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!

A Different Perspective

Although it hurts that China Foods returned a loss of 11% in the last twelve months, the broader market was actually worse, returning a loss of 21%. Longer term investors wouldn't be so upset, since they would have made 3%, each year, over five years. It could be that the business is just facing some short term problems, but shareholders should keep a close eye on the fundamentals. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for China Foods you should know about.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on HK 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.

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