Despite the downward trend in earnings at Hangzhou Freely Communication (SHSE:603602) the stock increases 4.3%, bringing three-year gains to 65%

By buying an index fund, you can roughly match the market return with ease. But many of us dare to dream of bigger returns, and build a portfolio ourselves. For example, Hangzhou Freely Communication Co., Ltd. (SHSE:603602) shareholders have seen the share price rise 63% over three years, well in excess of the market decline (19%, not including dividends). However, more recent returns haven't been as impressive as that, with the stock returning just 15% in the last year, including dividends.

Since it's been a strong week for Hangzhou Freely Communication shareholders, let's have a look at trend of the longer term fundamentals.

See our latest analysis for Hangzhou Freely Communication

To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it's a weighing machine. 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.

Over the last three years, Hangzhou Freely Communication failed to grow earnings per share, which fell 15% (annualized).

So we doubt that the market is looking to EPS for its main judge of the company's value. Therefore, we think it's worth considering other metrics as well.

The modest 0.4% dividend yield is unlikely to be propping up the share price. It may well be that Hangzhou Freely Communication revenue growth rate of 23% over three years has convinced shareholders to believe in a brighter future. In that case, the company may be sacrificing current earnings per share to drive growth, and maybe shareholder's faith in better days ahead will be rewarded.

The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).

Take a more thorough look at Hangzhou Freely Communication's financial health with this free report on its balance sheet.

What About Dividends?

As well as measuring the share price return, investors should also consider the total shareholder return (TSR). The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. As it happens, Hangzhou Freely Communication's TSR for the last 3 years was 65%, which exceeds the share price return mentioned earlier. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

It's nice to see that Hangzhou Freely Communication shareholders have received a total shareholder return of 15% over the last year. And that does include the dividend. Notably the five-year annualised TSR loss of 1.5% per year compares very unfavourably with the recent share price performance. The long term loss makes us cautious, but the short term TSR gain certainly hints at a brighter future. 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. Take risks, for example - Hangzhou Freely Communication has 4 warning signs (and 2 which are a bit unpleasant) we think you should know about.

Of course Hangzhou Freely Communication may not be the best stock to buy. So you may wish to see this free collection of growth stocks.

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.