Investors more bullish on Shanghai Lianming Machinery (SHSE:603006) this week as stock spikes 12%, despite earnings trending downwards over past three years

One simple way to benefit from the stock market is to buy an index fund. But many of us dare to dream of bigger returns, and build a portfolio ourselves. Just take a look at Shanghai Lianming Machinery Co., Ltd. (SHSE:603006), which is up 18%, over three years, soundly beating the market decline of 25% (not including dividends).

Since the stock has added CN¥275m to its market cap in the past week alone, let's see if underlying performance has been driving long-term returns.

Check out our latest analysis for Shanghai Lianming Machinery

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. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.

During the three years of share price growth, Shanghai Lianming Machinery actually saw its earnings per share (EPS) drop 12% per year.

This means it's unlikely the market is judging the company based on earnings growth. Given this situation, it makes sense to look at other metrics too.

You can only imagine how long term shareholders feel about the declining revenue trend (slipping at 4.0% per year). What's clear is that historic earnings and revenue aren't matching up with the share price action, very well. So you might have to dig deeper to get a grasp of the situation

You can see below how earnings and revenue have changed over time (discover the exact values by clicking on the image).

This free interactive report on Shanghai Lianming Machinery's balance sheet strength is a great place to start, if you want to investigate the stock further.

What About Dividends?

It is important to consider the total shareholder return, as well as the share price return, for any given stock. Whereas the share price return only reflects the change in the share price, the TSR includes the value of dividends (assuming they were reinvested) and the benefit of any discounted capital raising or spin-off. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. We note that for Shanghai Lianming Machinery the TSR over the last 3 years was 31%, which is better than the share price return mentioned above. The dividends paid by the company have thusly boosted the total shareholder return.

A Different Perspective

While it's never nice to take a loss, Shanghai Lianming Machinery shareholders can take comfort that , including dividends,their trailing twelve month loss of 4.9% wasn't as bad as the market loss of around 6.0%. Of course, the long term returns are far more important and the good news is that over five years, the stock has returned 1.4% for each year. In the best case scenario the last year is just a temporary blip on the journey to a brighter future. 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 instance, we've identified 2 warning signs for Shanghai Lianming Machinery that you should be aware of.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: many of them are unnoticed AND have attractive valuation).

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.