It's easy to match the overall market return by buying an index fund. When you buy individual stocks, you can make higher profits, but you also face the risk of under-performance. Investors in Zhongyuan Bank Co., Ltd. (HKG:1216) have tasted that bitter downside in the last year, as the share price dropped 48%. That's well bellow the market return of 10%. Zhongyuan Bank may have better days ahead, of course; we've only looked at a one year period. It's up 2.6% in the last seven days.
In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. One flawed but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.
Unfortunately Zhongyuan Bank reported an EPS drop of 20% for the last year. This reduction in EPS is not as bad as the 48% share price fall. Unsurprisingly, given the lack of EPS growth, the market seems to be more cautious about the stock. The P/E ratio of 7.42 also points to the negative market sentiment.
You can see how EPS has changed over time in the image below (click on the chart to see the exact values).
Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here.
A Different Perspective
While Zhongyuan Bank shareholders are down 47% for the year (even including dividends) , the market itself is up 10%. While the aim is to do better than that, it's worth recalling that even great long-term investments sometimes underperform for a year or more. Putting aside the last twelve months, it's good to see the share price has rebounded by 0.8%, in the last ninety days. This could just be a bounce because the selling was too aggressive, but fingers crossed it's the start of a new trend. It's always interesting to track share price performance over the longer term. But to understand Zhongyuan Bank better, we need to consider many other factors. Take risks, for example - Zhongyuan Bank has 2 warning signs (and 1 which is a bit concerning) we think you should know about.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.
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