If you want to compound wealth in the stock market, you can do so by buying an index fund. But one can do better than that by picking better than average stocks (as part of a diversified portfolio). For example, the China Tower Corporation Limited (HKG:788) share price is up 14% in the last year, clearly besting the market return of around 4.5% (not including dividends). If it can keep that out-performance up over the long term, investors will do very well! Note that businesses generally develop over the long term, so the returns over the last year might not reflect a long term trend.
While the efficient markets hypothesis continues to be taught by some, it has been proven that markets are over-reactive dynamic systems, and investors are not always rational. 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 last year China Tower grew its earnings per share (EPS) by 54%. It's fair to say that the share price gain of 14% did not keep pace with the EPS growth. So it seems like the market has cooled on China Tower, despite the growth. Interesting. Of course, with a P/E ratio of 62.01, the market remains optimistic.
The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).
It is of course excellent to see how China Tower has grown profits over the years, but the future is more important for shareholders. Take a more thorough look at China Tower's financial health with this free report on its balance sheet.
A Different Perspective
China Tower boasts a total shareholder return of 14% for the last year (that includes the dividends) . And the share price momentum remains respectable, with a gain of 7.7% in the last three months. This suggests the company is continuing to win over new investors. It's always interesting to track share price performance over the longer term. But to understand China Tower better, we need to consider many other factors. Take risks, for example - China Tower has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies we expect will grow earnings.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on HK exchanges.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.