Despite the downward trend in earnings at Zhejiang Garden BiopharmaceuticalLtd (SZSE:300401) the stock hikes 22%, bringing one-year gains to 28%

Passive investing in index funds can generate returns that roughly match the overall market. But if you pick the right individual stocks, you could make more than that. To wit, the Zhejiang Garden Biopharmaceutical Co.,Ltd. (SZSE:300401) share price is 28% higher than it was a year ago, much better than the market decline of around 17% (not including dividends) in the same period. That's a solid performance by our standards! However, the stock hasn't done so well in the longer term, with the stock only up 14% in three years.

Since the stock has added CN¥1.4b to its market cap in the past week alone, let's see if underlying performance has been driving long-term returns.

Check out our latest analysis for Zhejiang Garden BiopharmaceuticalLtd

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 the last year, Zhejiang Garden BiopharmaceuticalLtd actually saw its earnings per share drop 16%.

Given the share price gain, we doubt the market is measuring progress with EPS. Indeed, when EPS is declining but the share price is up, it often means the market is considering other factors.

We are skeptical of the suggestion that the 0.5% dividend yield would entice buyers to the stock. Unfortunately Zhejiang Garden BiopharmaceuticalLtd's fell 18% over twelve months. So using a snapshot of key business metrics doesn't give us a good picture of why the market is bidding up the stock.

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 Zhejiang Garden BiopharmaceuticalLtd's financial health with this free report on its balance sheet.

A Different Perspective

We're pleased to report that Zhejiang Garden BiopharmaceuticalLtd shareholders have received a total shareholder return of 28% over one year. That's including the dividend. Notably the five-year annualised TSR loss of 2% per year compares very unfavourably with the recent share price performance. This makes us a little wary, but the business might have turned around its fortunes. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Take risks, for example - Zhejiang Garden BiopharmaceuticalLtd has 1 warning sign we think you should be aware of.

Of course Zhejiang Garden BiopharmaceuticalLtd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com