Passive investing in an index fund is a good way to ensure your own returns roughly match the overall market. While individual stocks can be big winners, plenty more fail to generate satisfactory returns. Investors in Cangzhou Dahua Co., Ltd. (SHSE:600230) have tasted that bitter downside in the last year, as the share price dropped 40%. That's well below the market decline of 4.8%. On the other hand, the stock is actually up 32% over three years. The falls have accelerated recently, with the share price down 13% in the last three months. Of course, this share price action may well have been influenced by the 7.0% decline in the broader market, throughout the period.

Since Cangzhou Dahua has shed CN¥387m 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 Cangzhou Dahua

While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. 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).

During the last year Cangzhou Dahua grew its earnings per share, moving from a loss to a profit.

When a company has just transitioned to profitability, earnings per share growth is not always the best way to look at the share price action. So it makes sense to check out some other factors.

Cangzhou Dahua's revenue is actually up 23% over the last year. Since the fundamental metrics don't readily explain the share price drop, there might be an opportunity if the market has overreacted.

The company's revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).

If you are thinking of buying or selling Cangzhou Dahua stock, you should check out this FREE detailed report on its balance sheet.

A Different Perspective

We regret to report that Cangzhou Dahua shareholders are down 39% for the year (even including dividends). Unfortunately, that's worse than the broader market decline of 4.8%. 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 4% 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 Cangzhou Dahua better, we need to consider many other factors. Even so, be aware that Cangzhou Dahua is showing 2 warning signs in our investment analysis , and 1 of those is potentially serious...

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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.