Guangxi Liugong Machinery (SZSE:000528) shareholders notch a 14% CAGR over 5 years, yet earnings have been shrinking

Generally speaking the aim of active stock picking is to find companies that provide returns that are superior to the market average. And the truth is, you can make significant gains if you buy good quality businesses at the right price. For example, long term Guangxi Liugong Machinery Co., Ltd. (SZSE:000528) shareholders have enjoyed a 72% share price rise over the last half decade, well in excess of the market return of around 9.9% (not including dividends). On the other hand, the more recent gains haven't been so impressive, with shareholders gaining just 48%, including dividends.

Since the stock has added CN¥2.2b 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 Guangxi Liugong 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. 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.

Guangxi Liugong Machinery's earnings per share are down 0.5% per year, despite strong share price performance over five years.

So it's hard to argue that the earnings per share are the best metric to judge the company, as it may not be optimized for profits at this point. Therefore, it's worth taking a look at other metrics to try to understand the share price movements.

We doubt the modest 1.8% dividend yield is attracting many buyers to the stock. In contrast revenue growth of 8.2% per year is probably viewed as evidence that Guangxi Liugong Machinery is growing, a real positive. In that case, the company may be sacrificing current earnings per share to drive growth.

The graphic below depicts how earnings and revenue have changed over time (unveil the exact values by clicking on the image).

We know that Guangxi Liugong Machinery has improved its bottom line lately, but what does the future have in store? So we recommend checking out this free report showing consensus forecasts

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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for Guangxi Liugong Machinery the TSR over the last 5 years was 89%, which is better than the share price return mentioned above. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

It's good to see that Guangxi Liugong Machinery has rewarded shareholders with a total shareholder return of 48% in the last twelve months. And that does include the dividend. That gain is better than the annual TSR over five years, which is 14%. Therefore it seems like sentiment around the company has been positive lately. Given the share price momentum remains strong, it might be worth taking a closer look at the stock, lest you miss an opportunity. It's always interesting to track share price performance over the longer term. But to understand Guangxi Liugong Machinery better, we need to consider many other factors. Even so, be aware that Guangxi Liugong Machinery is showing 2 warning signs in our investment analysis , you should know about...

We will like Guangxi Liugong Machinery better if we see some big insider buys. While we wait, check out this free list of undervalued stocks (mostly small caps) with considerable, recent, insider buying.

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.