Despite the downward trend in earnings at Shenzhen Topway Video Communication (SZSE:002238) the stock surges 13%, bringing three-year gains to 52%

By buying an index fund, investors can approximate the average market return. But if you buy good businesses at attractive prices, your portfolio returns could exceed the average market return. For example, the Shenzhen Topway Video Communication Co., Ltd (SZSE:002238) share price is up 45% in the last three years, clearly besting the market decline of around 25% (not including dividends). However, more recent returns haven't been as impressive as that, with the stock returning just 26% in the last year, including dividends.

Since the stock has added CN¥738m 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 Shenzhen Topway Video Communication

To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace...' By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.

Over the last three years, Shenzhen Topway Video Communication failed to grow earnings per share, which fell 22% (annualized).

So we doubt that the market is looking to EPS for its main judge of the company's value. Given this situation, it makes sense to look at other metrics too.

Languishing at just 1.2%, we doubt the dividend is doing much to prop up the share price. You can only imagine how long term shareholders feel about the declining revenue trend (slipping at 8.0% per year). What's clear is that historic earnings and revenue aren't matching up with the share price action, very well. So you might have to dig deeper to get a grasp of the situation

The graphic below depicts how earnings and revenue have changed over time (unveil the exact values by clicking on the image).

If you are thinking of buying or selling Shenzhen Topway Video Communication stock, you should check out this FREE detailed 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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. In the case of Shenzhen Topway Video Communication, it has a TSR of 52% for the last 3 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 Shenzhen Topway Video Communication shareholders have received a total shareholder return of 26% over the last year. And that does include the dividend. That's better than the annualised return of 9% over half a decade, implying that the company is doing better recently. Given the share price momentum remains strong, it might be worth taking a closer look at the stock, lest you miss an opportunity. It's always interesting to track share price performance over the longer term. But to understand Shenzhen Topway Video Communication better, we need to consider many other factors. For instance, we've identified 4 warning signs for Shenzhen Topway Video Communication (2 can't be ignored) that you should be aware of.

If you are like me, then you will not want to miss this free list of undervalued small caps that insiders are buying.

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.