Investors more bullish on Hunan Yujing MachineryLtd (SZSE:002943) this week as stock swells 14%, despite earnings trending downwards over past five years

Generally speaking the aim of active stock picking is to find companies that provide returns that are superior to the market average. Buying under-rated businesses is one path to excess returns. For example, long term Hunan Yujing Machinery Co.,Ltd (SZSE:002943) shareholders have enjoyed a 94% share price rise over the last half decade, well in excess of the market return of around 19% (not including dividends). On the other hand, the more recent gains haven't been so impressive, with shareholders gaining just 37%, including dividends.

Since the stock has added CN¥669m to its market cap in the past week alone, let's see if underlying performance has been driving long-term returns.

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While Hunan Yujing MachineryLtd made a small profit, in the last year, we think that the market is probably more focussed on the top line growth at the moment. As a general rule, we think this kind of company is more comparable to loss-making stocks, since the actual profit is so low. It would be hard to believe in a more profitable future without growing revenues.

In the last 5 years Hunan Yujing MachineryLtd saw its revenue grow at 36% per year. Even measured against other revenue-focussed companies, that's a good result. It's good to see that the stock has 14%, but not entirely surprising given revenue shows strong growth. If the strong revenue growth continues, we'd hope to see the share price to follow, in time. Opportunity lies where the market hasn't fully priced growth in the underlying business.

The company's revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).

Take a more thorough look at Hunan Yujing MachineryLtd's financial health with this free report on its balance sheet.

What About Dividends?

It is important to consider the total shareholder return, as well as the share price return, for any given stock. Whereas the share price return only reflects the change in the share price, the TSR includes the value of dividends (assuming they were reinvested) and the benefit of any discounted capital raising or spin-off. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. We note that for Hunan Yujing MachineryLtd the TSR over the last 5 years was 97%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!

A Different Perspective

We're pleased to report that Hunan Yujing MachineryLtd shareholders have received a total shareholder return of 37% over one year. And that does include the dividend. Since the one-year TSR is better than the five-year TSR (the latter coming in at 15% 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. For instance, we've identified 4 warning signs for Hunan Yujing MachineryLtd (3 are a bit concerning) that you should be aware of.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies we expect will 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.