Despite the downward trend in earnings at Nanjing Gaoke (SHSE:600064) the stock lifts 3.6%, bringing one-year gains to 38%

If you want to compound wealth in the stock market, you can do so by buying an index fund. But one can do better than that by picking better than average stocks (as part of a diversified portfolio). To wit, the Nanjing Gaoke Company Limited (SHSE:600064) share price is 32% higher than it was a year ago, much better than the market return of around 4.2% (not including dividends) in the same period. So that should have shareholders smiling. Having said that, the longer term returns aren't so impressive, with stock gaining just 23% in three years.

Since it's been a strong week for Nanjing Gaoke shareholders, let's have a look at trend of the longer term fundamentals.

View our latest analysis for Nanjing Gaoke

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 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.

Over the last twelve months, Nanjing Gaoke actually shrank its EPS by 50%.

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.

Unfortunately Nanjing Gaoke's fell 70% over twelve months. So the fundamental metrics don't provide an obvious explanation for the share price gain.

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

This free interactive report on Nanjing Gaoke's balance sheet strength is a great place to start, if you want to investigate the stock further.

What About Dividends?

It is important to consider the total shareholder return, as well as the share price return, for any given stock. 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 Nanjing Gaoke, it has a TSR of 38% for the last 1 year. That exceeds its share price return that we previously mentioned. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

It's good to see that Nanjing Gaoke has rewarded shareholders with a total shareholder return of 38% in the last twelve months. Of course, that includes the dividend. Since the one-year TSR is better than the five-year TSR (the latter coming in at 10% per year), it would seem that the stock's performance has improved in recent times. Given the share price momentum remains strong, it might be worth taking a closer look at the stock, lest you miss an opportunity. 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. Case in point: We've spotted 2 warning signs for Nanjing Gaoke you should be aware of, and 1 of them makes us a bit uncomfortable.

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.