The three-year decline in earnings might be taking its toll on China Everbright Environment Group (HKG:257) shareholders as stock falls 3.4% over the past week

One simple way to benefit from the stock market is to buy an index fund. But if you buy good businesses at attractive prices, your portfolio returns could exceed the average market return. For example, the China Everbright Environment Group Limited (HKG:257) share price is up 46% in the last three years, clearly besting the market return of around 36% (not including dividends). On the other hand, the returns haven't been quite so good recently, with shareholders up just 32%, including dividends.

In light of the stock dropping 3.4% in the past week, we want to investigate the longer term story, and see if fundamentals have been the driver of the company's positive three-year return.

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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 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).

Over the last three years, China Everbright Environment Group failed to grow earnings per share, which fell 18% (annualized).

So we doubt that the market is looking to EPS for its main judge of the company's value. Given this situation, it makes sense to look at other metrics too.

The dividend is no better now than it was three years ago, so that is unlikely to have driven the share price higher. Many investors probably think the fact that China Everbright Environment Group's revenue has been declining at a rate of 13% per year is a real negative. If revenue keeps shrinking, it may be difficult to find earnings growth in the future.

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

China Everbright Environment Group is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. If you are thinking of buying or selling China Everbright Environment Group stock, you should check out this free report showing analyst consensus estimates for future profits.

What About Dividends?

As well as measuring the share price return, investors should also consider the total shareholder return (TSR). The TSR is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. In the case of China Everbright Environment Group, it has a TSR of 78% 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

China Everbright Environment Group shareholders have received returns of 32% over twelve months (even including dividends), which isn't far from the general market return. Most would be happy with a gain, and it helps that the year's return is actually better than the average return over five years, which was 10%. It is possible that management foresight will bring growth well into the future, even if the share price slows down. It's always interesting to track share price performance over the longer term. But to understand China Everbright Environment Group better, we need to consider many other factors. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for China Everbright Environment Group (of which 1 is significant!) you should know about.

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Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on Hong Kong 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.