The total return for Zhongji Innolight (SZSE:300308) investors has risen faster than earnings growth over the last three years

For us, stock picking is in large part the hunt for the truly magnificent stocks. But when you hold the right stock for the right time period, the rewards can be truly huge. Take, for example, the Zhongji Innolight Co., Ltd. (SZSE:300308) share price, which skyrocketed 367% over three years. Also pleasing for shareholders was the 11% gain in the last three months.

Since the long term performance has been good but there's been a recent pullback of 8.0%, let's check if the fundamentals match the share price.

Check out our latest analysis for Zhongji Innolight

In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. One way to examine how market sentiment has changed over time is to look at the interaction between a company's share price and its earnings per share (EPS).

During three years of share price growth, Zhongji Innolight achieved compound earnings per share growth of 45% per year. In comparison, the 67% per year gain in the share price outpaces the EPS growth. This suggests that, as the business progressed over the last few years, it gained the confidence of market participants. That's not necessarily surprising considering the three-year track record of earnings growth. This favorable sentiment is reflected in its (fairly optimistic) P/E ratio of 48.80.

You can see how EPS has changed over time in the image below (click on the chart to see the exact values).

It is of course excellent to see how Zhongji Innolight has grown profits over the years, but the future is more important for shareholders. This free interactive report on Zhongji Innolight's balance sheet strength is a great place to start, if you want to investigate the stock further.

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 Zhongji Innolight, it has a TSR of 373% 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

We're pleased to report that Zhongji Innolight shareholders have received a total shareholder return of 42% over one year. That's including the dividend. That's better than the annualised return of 35% 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. 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 Zhongji Innolight you should be aware of, and 1 of them is significant.

If you would prefer to check out another company -- one with potentially superior financials -- then do not miss this free list of companies that have proven they can grow earnings.

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