Zhejiang Wanliyang (SZSE:002434) investors are up 5.1% in the past week, but earnings have declined over the last year

If you want to compound wealth in the stock market, you can do so by buying an index fund. But one can do better than that by picking better than average stocks (as part of a diversified portfolio). For example, the Zhejiang Wanliyang Co., Ltd. (SZSE:002434) share price is up 28% in the last 1 year, clearly besting the market return of around 15% (not including dividends). So that should have shareholders smiling. In contrast, the longer term returns are negative, since the share price is 1.3% lower than it was three years ago.

After a strong gain in the past week, it's worth seeing if longer term returns have been driven by improving fundamentals.

See our latest analysis for Zhejiang Wanliyang

There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. One imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.

During the last year, Zhejiang Wanliyang actually saw its earnings per share drop 31%.

This means it's unlikely the market is judging the company based on earnings growth. Indeed, when EPS is declining but the share price is up, it often means the market is considering other factors.

However the year on year revenue growth of 9.6% would help. Many businesses do go through a phase where they have to forgo some profits to drive business development, and sometimes its for the best.

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

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

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, Zhejiang Wanliyang's TSR for the last 1 year was 35%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!

A Different Perspective

We're pleased to report that Zhejiang Wanliyang shareholders have received a total shareholder return of 35% over one year. Of course, that includes the dividend. Since the one-year TSR is better than the five-year TSR (the latter coming in at 0.8% per year), it would seem that the stock's performance has improved in recent times. In the best case scenario, this may hint at some real business momentum, implying that now could be a great time to delve deeper. 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. To that end, you should learn about the 3 warning signs we've spotted with Zhejiang Wanliyang (including 2 which are a bit unpleasant) .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.