For many, the main point of investing in the stock market is to achieve spectacular returns. While the best companies are hard to find, but they can generate massive returns over long periods. Just think about the savvy investors who held Zhongji Innolight Co., Ltd. (SZSE:300308) shares for the last five years, while they gained 343%. If that doesn't get you thinking about long term investing, we don't know what will. Then again, the 9.9% share price decline hasn't been so fun for shareholders. This could be related to the soft market, with stocks down around 2.7% in the last month.

Although Zhongji Innolight has shed CN¥12b from its market cap this week, let's take a look at its longer term fundamental trends and see if they've driven returns.

There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. One imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.

Over half a decade, Zhongji Innolight managed to grow its earnings per share at 33% a year. So the EPS growth rate is rather close to the annualized share price gain of 35% per year. That suggests that the market sentiment around the company hasn't changed much over that time. Rather, the share price has approximately tracked EPS growth.

You can see below how EPS has changed over time (discover the exact values by clicking on the image).

We know that Zhongji Innolight has improved its bottom line over the last three years, but what does the future have in store? This free interactive report on Zhongji Innolight's balance sheet strength 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. As it happens, Zhongji Innolight's TSR for the last 5 years was 350%, 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 Zhongji Innolight has rewarded shareholders with a total shareholder return of 37% in the last twelve months. Of course, that includes the dividend. That's better than the annualised return of 35% over half a decade, implying that the company is doing better recently. Someone with an optimistic perspective could view the recent improvement in TSR as indicating that the business itself is getting better with time. 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 2 warning signs with Zhongji Innolight (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

We will like Zhongji Innolight better if we see some big insider buys. While we wait, check out this free list of undervalued stocks (mostly small caps) with considerable, recent, insider buying.

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