Generally speaking the aim of active stock picking is to find companies that provide returns that are superior to the market average. And the truth is, you can make significant gains if you buy good quality businesses at the right price. For example, the Inner Mongolia Junzheng Energy & Chemical Group Co.,Ltd. (SHSE:601216) share price is up 39% in the last 5 years, clearly besting the market return of around 11% (ignoring dividends).

Since the stock has added CN¥3.0b to its market cap in the past week alone, let's see if underlying performance has been driving long-term returns.

To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace...' By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.

Over half a decade, Inner Mongolia Junzheng Energy & Chemical GroupLtd managed to grow its earnings per share at 8.4% a year. The EPS growth is more impressive than the yearly share price gain of 7% over the same period. Therefore, it seems the market has become relatively pessimistic about the company. This cautious sentiment is reflected in its (fairly low) P/E ratio of 9.18.

The company's earnings per share (over time) is depicted in the image below (click to see the exact numbers).

It might be well worthwhile taking a look at our free report on Inner Mongolia Junzheng Energy & Chemical GroupLtd's earnings, revenue and cash flow.

What About Dividends?

When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. Whereas the share price return only reflects the change in the share price, the TSR includes the value of dividends (assuming they were reinvested) and the benefit of any discounted capital raising or spin-off. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. We note that for Inner Mongolia Junzheng Energy & Chemical GroupLtd the TSR over the last 5 years was 79%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!

A Different Perspective

While it's never nice to take a loss, Inner Mongolia Junzheng Energy & Chemical GroupLtd shareholders can take comfort that , including dividends,their trailing twelve month loss of 6.6% wasn't as bad as the market loss of around 24%. Longer term investors wouldn't be so upset, since they would have made 12%, each year, over five years. It could be that the business is just facing some short term problems, but shareholders should keep a close eye on the fundamentals. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Inner Mongolia Junzheng Energy & Chemical GroupLtd , and understanding them should be part of your investment process.

But note: Inner Mongolia Junzheng Energy & Chemical GroupLtd may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).

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.