Kuang-Chi Technologies (SZSE:002625) stock performs better than its underlying earnings growth over last five years

Buying shares in the best businesses can build meaningful wealth for you and your family. While the best companies are hard to find, but they can generate massive returns over long periods. Just think about the savvy investors who held Kuang-Chi Technologies Co., Ltd. (SZSE:002625) shares for the last five years, while they gained 411%. And this is just one example of the epic gains achieved by some long term investors. In the last week the share price is up 5.2%.

Since the stock has added CN¥4.6b to its market cap in the past week alone, let's see if underlying performance has been driving long-term returns.

See our latest analysis for Kuang-Chi Technologies

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.

During five years of share price growth, Kuang-Chi Technologies achieved compound earnings per share (EPS) growth of 48% per year. The EPS growth is more impressive than the yearly share price gain of 39% over the same period. So one could conclude that the broader market has become more cautious towards the stock. Of course, with a P/E ratio of 138.07, the market remains optimistic.

The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).

It is of course excellent to see how Kuang-Chi Technologies has grown profits over the years, but the future is more important for shareholders. Take a more thorough look at Kuang-Chi Technologies' financial health with this free report on its balance sheet.

What About Dividends?

When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. 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 Kuang-Chi Technologies, it has a TSR of 419% for the last 5 years. That exceeds its share price return that we previously mentioned. The dividends paid by the company have thusly boosted the total shareholder return.

A Different Perspective

We're pleased to report that Kuang-Chi Technologies shareholders have received a total shareholder return of 213% over one year. Of course, that includes the dividend. That's better than the annualised return of 39% over half a decade, implying that the company is doing better recently. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Kuang-Chi Technologies (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

Of course Kuang-Chi Technologies 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.