Investors more bullish on Dongguan Development (Holdings) (SZSE:000828) this week as stock rallies 6.5%, despite earnings trending downwards over past five years

Generally speaking the aim of active stock picking is to find companies that provide returns that are superior to the market average. And while active stock picking involves risks (and requires diversification) it can also provide excess returns. To wit, the Dongguan Development (Holdings) share price has climbed 13% in five years, easily topping the market decline of 7.9% (ignoring dividends). However, more recent returns haven't been as impressive as that, with the stock returning just 5.5% in the last year, including dividends.

Since the stock has added CN¥582m to its market cap in the past week alone, let's see if underlying performance has been driving long-term returns.

See our latest analysis for Dongguan Development (Holdings)

While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. 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.

Dongguan Development (Holdings)'s earnings per share are down 13% per year, despite strong share price performance over five years.

Since the EPS are down strongly, it seems highly unlikely market participants are looking at EPS to value the company. The falling EPS doesn't correlate with the climbing share price, so it's worth taking a look at other metrics.

In contrast revenue growth of 24% per year is probably viewed as evidence that Dongguan Development (Holdings) is growing, a real positive. In that case, the company may be sacrificing current earnings per share to drive growth.

You can see below how earnings and revenue have changed over time (discover the exact values by clicking on the image).

Take a more thorough look at Dongguan Development (Holdings)'s financial health with this free report on its balance sheet.

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. We note that for Dongguan Development (Holdings) the TSR over the last 5 years was 32%, which is better than the share price return mentioned above. The dividends paid by the company have thusly boosted the total shareholder return.

A Different Perspective

It's good to see that Dongguan Development (Holdings) has rewarded shareholders with a total shareholder return of 5.5% in the last twelve months. Of course, that includes the dividend. Having said that, the five-year TSR of 6% a year, is even better. It's always interesting to track share price performance over the longer term. But to understand Dongguan Development (Holdings) better, we need to consider many other factors. Take risks, for example - Dongguan Development (Holdings) has 3 warning signs (and 2 which are significant) we think you should know about.

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.