Optimism for Jiangsu Yawei Machine Tool (SZSE:002559) has grown this past week, despite five-year decline in earnings

Stock pickers are generally looking for stocks that will outperform the broader market. And in our experience, buying the right stocks can give your wealth a significant boost. For example, the Jiangsu Yawei Machine Tool Co., Ltd. (SZSE:002559) share price is up 72% in the last 5 years, clearly besting the market return of around 16% (ignoring dividends). On the other hand, the more recent gains haven't been so impressive, with shareholders gaining just 15%, including dividends.

Since the stock has added CN¥418m to its market cap in the past week alone, let's see if underlying performance has been driving long-term returns.

View our latest analysis for Jiangsu Yawei Machine Tool

While the efficient markets hypothesis continues to be taught by some, it has been proven that markets are over-reactive dynamic systems, and investors are not always rational. 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 five years of share price growth, Jiangsu Yawei Machine Tool actually saw its EPS drop 2.7% per year.

By glancing at these numbers, we'd posit that the decline in earnings per share is not representative of how the business has changed over the years. Since the change in EPS doesn't seem to correlate with the change in share price, it's worth taking a look at other metrics.

We doubt the modest 1.1% dividend yield is attracting many buyers to the stock. On the other hand, Jiangsu Yawei Machine Tool's revenue is growing nicely, at a compound rate of 5.8% over the last five years. It's quite possible that management are prioritizing revenue growth over EPS growth at the moment.

You can see how earnings and revenue have changed over time in the image below (click on the chart to see the exact values).

You can see how its balance sheet has strengthened (or weakened) over time in this free interactive graphic.

What About Dividends?

It is important to consider the total shareholder return, as well as the share price return, for any given stock. 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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. In the case of Jiangsu Yawei Machine Tool, it has a TSR of 87% for the last 5 years. That exceeds its share price return that we previously mentioned. This is largely a result of its dividend payments!

A Different Perspective

It's nice to see that Jiangsu Yawei Machine Tool shareholders have received a total shareholder return of 15% over the last year. That's including the dividend. That's better than the annualised return of 13% over half a decade, implying that the company is doing better recently. Someone with an optimistic perspective could view the recent improvement in TSR as indicating that the business itself is getting better with time. It's always interesting to track share price performance over the longer term. But to understand Jiangsu Yawei Machine Tool better, we need to consider many other factors. To that end, you should learn about the 2 warning signs we've spotted with Jiangsu Yawei Machine Tool (including 1 which is a bit unpleasant) .

But note: Jiangsu Yawei Machine Tool may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).

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.