Investors more bullish on Skyworth Digital (SZSE:000810) this week as stock rallies 8.9%, despite earnings trending downwards over past three years

By buying an index fund, investors can approximate the average market return. But many of us dare to dream of bigger returns, and build a portfolio ourselves. Just take a look at Skyworth Digital Co., Ltd. (SZSE:000810), which is up 60%, over three years, soundly beating the market decline of 13% (not including dividends). On the other hand, the returns haven't been quite so good recently, with shareholders up just 5.5%, including dividends.

After a strong gain in the past week, it's worth seeing if longer term returns have been driven by improving fundamentals.

Check out our latest analysis for Skyworth Digital

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 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.

Over the last three years, Skyworth Digital failed to grow earnings per share, which fell 1.2% (annualized).

Given the share price resilience, we don't think the (declining) EPS numbers are a good measure of how the business is moving forward, right now. Therefore, it makes sense to look into other metrics.

Languishing at just 1.1%, 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 4.3% 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 company's revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).

Balance sheet strength is crucial. It might be well worthwhile taking a look at our free report on how its financial position has changed over time.

What About Dividends?

When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. 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. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. In the case of Skyworth Digital, it has a TSR of 66% for the last 3 years. 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

Skyworth Digital shareholders gained a total return of 5.5% during the year. But that return falls short of the market. If we look back over five years, the returns are even better, coming in at 6% per year for five years. Maybe the share price is just taking a breather while the business executes on its growth strategy. 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 Skyworth Digital you should be aware of, and 1 of them is significant.

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.