Pulling back 9.1% this week, Daoming Optics&ChemicalLtd's SZSE:002632) five-year decline in earnings may be coming into investors focus

Generally speaking the aim of active stock picking is to find companies that provide returns that are superior to the market average. And in our experience, buying the right stocks can give your wealth a significant boost. For example, the Daoming Optics&Chemical Co.,Ltd (SZSE:002632) share price is up 14% in the last 5 years, clearly besting the market decline of around 9.4% (ignoring dividends). On the other hand, the more recent gains haven't been so impressive, with shareholders gaining just 4.3%, including dividends.

In light of the stock dropping 9.1% in the past week, we want to investigate the longer term story, and see if fundamentals have been the driver of the company's positive five-year return.

View our latest analysis for Daoming Optics&ChemicalLtd

To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it's a weighing machine. 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, Daoming Optics&ChemicalLtd actually saw its EPS drop 2.4% per year.

With EPS falling, but a modestly increasing share price, it seems that the market was probably too pessimistic about the stock in the past. In the long term, though, it will be hard for the share price rises to continue without improving EPS.

The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).

Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here.

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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for Daoming Optics&ChemicalLtd the TSR over the last 5 years was 29%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!

A Different Perspective

It's nice to see that Daoming Optics&ChemicalLtd shareholders have received a total shareholder return of 4.3% over the last year. And that does include the dividend. Having said that, the five-year TSR of 5% a year, is even better. It's always interesting to track share price performance over the longer term. But to understand Daoming Optics&ChemicalLtd better, we need to consider many other factors. Case in point: We've spotted 4 warning signs for Daoming Optics&ChemicalLtd you should be aware of, and 1 of them shouldn't be ignored.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: many of them are unnoticed AND have attractive valuation).

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.