Shandong Xinhua Pharmaceutical (HKG:719) stock performs better than its underlying earnings growth over last five years

When we invest, we're generally looking for stocks that outperform the market average. And while active stock picking involves risks (and requires diversification) it can also provide excess returns. For example, the Shandong Xinhua Pharmaceutical Company Limited (HKG:719) share price is up 80% in the last 5 years, clearly besting the market return of around 1.2% (ignoring dividends). However, more recent returns haven't been as impressive as that, with the stock returning just 17% in the last year, including dividends.

Since the stock has added HK$512m 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 Shandong Xinhua Pharmaceutical

There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. One flawed but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.

Over half a decade, Shandong Xinhua Pharmaceutical managed to grow its earnings per share at 9.9% a year. This EPS growth is slower than the share price growth of 13% per year, over the same period. So it's fair to assume the market has a higher opinion of the business than it did five years ago. That's not necessarily surprising considering the five-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).

It's probably worth noting that the CEO is paid less than the median at similar sized companies. It's always worth keeping an eye on CEO pay, but a more important question is whether the company will grow earnings throughout the years. This free interactive report on Shandong Xinhua Pharmaceutical's earnings, revenue and cash flow is a great place to start, if you want to investigate the stock further.

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 Shandong Xinhua Pharmaceutical, it has a TSR of 119% for the last 5 years. That exceeds its share price return that we previously mentioned. This is largely a result of its dividend payments!

A Different Perspective

Shandong Xinhua Pharmaceutical shareholders have received returns of 17% over twelve months (even including dividends), which isn't far from the general market return. It has to be noted that the recent return falls short of the 17% shareholders have gained each year, over half a decade. More recently, the share price growth has slowed. But it has to be said the overall picture is one of good long term and short term performance. Arguably that makes Shandong Xinhua Pharmaceutical a stock worth watching. Is Shandong Xinhua Pharmaceutical cheap compared to other companies? These 3 valuation measures might help you decide.

For those who like to find winning investments this free list of undervalued companies with recent insider purchasing, could be just the ticket.

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.