In order to justify the effort of selecting individual stocks, it's worth striving to beat the returns from a market index fund. But the risk of stock picking is that you will likely buy under-performing companies. We regret to report that long term Guangdong Topstar Technology Co., Ltd. (SZSE:300607) shareholders have had that experience, with the share price dropping 39% in three years, versus a market decline of about 26%. But it's up 8.3% in the last week.

On a more encouraging note the company has added CN¥417m to its market cap in just the last 7 days, so let's see if we can determine what's driven the three-year loss for shareholders.

There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. 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).

Guangdong Topstar Technology saw its EPS decline at a compound rate of 36% per year, over the last three years. This fall in the EPS is worse than the 15% compound annual share price fall. So, despite the prior disappointment, shareholders must have some confidence the situation will improve, longer term. This positive sentiment is also reflected in the generous P/E ratio of 51.64.

You can see below how EPS has changed over time (discover 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. It might be well worthwhile taking a look at our free report on Guangdong Topstar Technology's earnings, revenue and cash flow.

A Different Perspective

The total return of 14% received by Guangdong Topstar Technology shareholders over the last year isn't far from the market return of -14%. Longer term investors wouldn't be so upset, since they would have made 1.5%, each year, over five years. If the fundamental data remains strong, and the share price is simply down on sentiment, then this could be an opportunity worth investigating. Before deciding if you like the current share price, check how Guangdong Topstar Technology scores on these 3 valuation metrics.

But note: Guangdong Topstar Technology 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.

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