While not a mind-blowing move, it is good to see that the Chuan Holdings Limited (HKG:1420) share price has gained 20% in the last three months. But over the last three years we've seen a quite serious decline. Regrettably, the share price slid 69% in that period. So it's good to see it climbing back up. Perhaps the company has turned over a new leaf.
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 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.
During the three years that the share price fell, Chuan Holdings's earnings per share (EPS) dropped by 49% each year. This fall in the EPS is worse than the 32% compound annual share price fall. This suggests that the market retains some optimism around long term earnings stability, despite past EPS declines.
You can see how EPS has changed over time in the image below (click on the chart to see the exact values).
It's probably worth noting we've seen significant insider buying in the last quarter, which we consider a positive. That said, we think earnings and revenue growth trends are even more important factors to consider. It might be well worthwhile taking a look at our free report on Chuan Holdings's earnings, revenue and cash flow.
A Different Perspective
The last twelve months weren't great for Chuan Holdings shares, which performed worse than the market, costing holders 54%. Meanwhile, the broader market slid about 5.2%, likely weighing on the stock. Shareholders have lost 32% per year over the last three years, so the share price drop has become steeper, over the last year; a potential symptom of as yet unsolved challenges. We would be wary of buying into a company with unsolved problems, although some investors will buy into struggling stocks if they believe the price is sufficiently attractive. 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. For example, we've discovered 4 warning signs for Chuan Holdings (1 is potentially serious!) that you should be aware of before investing here.
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.
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