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Volatility 101: Should China Resources Pharmaceutical Group (HKG:3320) Shares Have Dropped 34%?

Simply Wall St

This week we saw the China Resources Pharmaceutical Group Limited (HKG:3320) share price climb by 14%. But in truth the last year hasn't been good for the share price. In fact the stock is down 34% in the last year, well below the market return.

Check out our latest analysis for China Resources Pharmaceutical Group

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 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).

Even though the China Resources Pharmaceutical Group share price is down over the year, its EPS actually improved. It could be that the share price was previously over-hyped.

It's surprising to see the share price fall so much, despite the improved EPS. So it's easy to justify a look at some other metrics.

Given the yield is quite low, at 1.7%, we doubt the dividend can shed much light on the share price. China Resources Pharmaceutical Group managed to grow revenue over the last year, which is usually a real positive. 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).

SEHK:3320 Income Statement, February 8th 2020

China Resources Pharmaceutical Group is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. So it makes a lot of sense to check out what analysts think China Resources Pharmaceutical Group will earn in the future (free analyst consensus estimates)

What about the Total Shareholder Return (TSR)?

We've already covered China Resources Pharmaceutical Group's share price action, but we should also mention its total shareholder return (TSR). The TSR is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. Dividends have been really beneficial for China Resources Pharmaceutical Group shareholders, and that cash payout explains why its total shareholder loss of 33%, over the last year, isn't as bad as the share price return.

A Different Perspective

China Resources Pharmaceutical Group shareholders are down 33% for the year (even including dividends) , falling short of the market return. Meanwhile, the broader market slid about 3.1%, likely weighing on the stock. The three-year loss of 3.8% per year isn't as bad as the last twelve months, suggesting that the company has not been able to convince the market it has solved its problems. Although Warren Buffett famously said he likes to 'buy when there is blood on the streets', he also focusses on high quality stocks with solid prospects. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Case in point: We've spotted 1 warning sign for China Resources Pharmaceutical Group you should be aware of.

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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 HK exchanges.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.