When we invest, we're generally looking for stocks that outperform the market average. And in our experience, buying the right stocks can give your wealth a significant boost. For example, long term Wenzhou Hongfeng Electrical Alloy Co., Ltd. (SZSE:300283) shareholders have enjoyed a 18% share price rise over the last half decade, well in excess of the market return of around 0.6% (not including dividends). However, more recent returns haven't been as impressive as that, with the stock returning just 2.3% in the last year, including dividends.

Since the stock has added CN¥595m to its market cap in the past week alone, let's see if underlying performance has been driving long-term returns.

Given that Wenzhou Hongfeng Electrical Alloy only made minimal earnings in the last twelve months, we'll focus on revenue to gauge its business development. Generally speaking, we'd consider a stock like this alongside loss-making companies, simply because the quantum of the profit is so low. It would be hard to believe in a more profitable future without growing revenues.

For the last half decade, Wenzhou Hongfeng Electrical Alloy can boast revenue growth at a rate of 12% per year. That's a fairly respectable growth rate. Revenue has been growing at a reasonable clip, so it's debatable whether the share price growth of 3% full reflects the underlying business growth. If revenue growth can maintain for long enough, it's likely profits will flow. There's no doubt that it can be difficult to value pre-profit companies.

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

This free interactive report on Wenzhou Hongfeng Electrical Alloy's balance sheet strength is a great place to start, if you want to investigate the stock further.

What About Dividends?

It is important to consider the total shareholder return, as well as the share price return, for any given stock. 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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. As it happens, Wenzhou Hongfeng Electrical Alloy's TSR for the last 5 years was 21%, which exceeds the share price return mentioned earlier. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

It's good to see that Wenzhou Hongfeng Electrical Alloy has rewarded shareholders with a total shareholder return of 2.3% in the last twelve months. Of course, that includes the dividend. However, the TSR over five years, coming in at 4% per year, is even more impressive. The pessimistic view would be that be that the stock has its best days behind it, but on the other hand the price might simply be moderating while the business itself continues to execute. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with Wenzhou Hongfeng Electrical Alloy (at least 2 which make us uncomfortable) , and understanding them should be part of your investment process.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: many of them are unnoticed AND have attractive valuation).

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com