Dalian Huarui Heavy Industry Group (SZSE:002204) sheds 4.0% this week, as yearly returns fall more in line with earnings growth

Stock pickers are generally looking for stocks that will outperform the broader market. And while active stock picking involves risks (and requires diversification) it can also provide excess returns. For example, the Dalian Huarui Heavy Industry Group Co., LTD. (SZSE:002204) share price is up 61% in the last 5 years, clearly besting the market return of around 4.6% (ignoring dividends). On the other hand, the more recent gains haven't been so impressive, with shareholders gaining just 20%, including dividends.

While the stock has fallen 4.0% this week, it's worth focusing on the longer term and seeing if the stocks historical returns have been driven by the underlying fundamentals.

View our latest analysis for Dalian Huarui Heavy Industry 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).

During five years of share price growth, Dalian Huarui Heavy Industry Group achieved compound earnings per share (EPS) growth of 13% per year. The EPS growth is more impressive than the yearly share price gain of 10% over the same period. Therefore, it seems the market has become relatively pessimistic about the company.

You can see below how EPS has changed over time (discover the exact values by clicking on the image).

It is of course excellent to see how Dalian Huarui Heavy Industry Group has grown profits over the years, but the future is more important for shareholders. If you are thinking of buying or selling Dalian Huarui Heavy Industry Group stock, you should check out this FREE detailed 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, Dalian Huarui Heavy Industry Group's TSR for the last 5 years was 67%, 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

Dalian Huarui Heavy Industry Group shareholders are up 20% for the year (even including dividends). But that was short of the market average. The silver lining is that the gain was actually better than the average annual return of 11% per year over five year. This could indicate that the company is winning over new investors, as it pursues its strategy. It's always interesting to track share price performance over the longer term. But to understand Dalian Huarui Heavy Industry Group better, we need to consider many other factors. Take risks, for example - Dalian Huarui Heavy Industry Group has 1 warning sign we think you should be aware of.

If you would prefer to check out another company -- one with potentially superior financials -- then do not miss this free list of companies that have proven they can grow earnings.

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.