Changmao Biochemical Engineering (HKG:954) stock performs better than its underlying earnings growth over last three years

By buying an index fund, you can roughly match the market return with ease. But if you choose individual stocks with prowess, you can make superior returns. For example, Changmao Biochemical Engineering Company Limited (HKG:954) shareholders have seen the share price rise 48% over three years, well in excess of the market return (7.4%, not including dividends).

Since the stock has added HK$58m 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 Changmao Biochemical Engineering

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).

Changmao Biochemical Engineering was able to grow its EPS at 7.9% per year over three years, sending the share price higher. This EPS growth is lower than the 14% average annual increase in the share price. So it's fair to assume the market has a higher opinion of the business than it did three years ago. That's not necessarily surprising considering the three-year track record of earnings growth.

The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).

We're pleased to report that the CEO is remunerated more modestly than most CEOs at similarly capitalized companies. But while CEO remuneration is always worth checking, the really important question is whether the company can grow earnings going forward. Dive deeper into the earnings by checking this interactive graph of Changmao Biochemical Engineering's earnings, revenue and cash flow.

What About The Total Shareholder Return (TSR)?

We've already covered Changmao Biochemical Engineering's share price action, but we should also mention its total shareholder return (TSR). The TSR attempts to capture the value of dividends (as if they were reinvested) as well as any spin-offs or discounted capital raisings offered to shareholders. Its history of dividend payouts mean that Changmao Biochemical Engineering's TSR of 66% over the last 3 years is better than the share price return.

A Different Perspective

It's nice to see that Changmao Biochemical Engineering shareholders have received a total shareholder return of 38% over the last year. That gain is better than the annual TSR over five years, which is 7%. Therefore it seems like sentiment around the company has been positive lately. In the best case scenario, this may hint at some real business momentum, implying that now could be a great time to delve deeper. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. For instance, we've identified 2 warning signs for Changmao Biochemical Engineering (1 is concerning) that you should be aware of.

Of course Changmao Biochemical Engineering may not be the best stock to buy. So you may wish to see this free collection of growth stocks.

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.