Stock pickers are generally looking for stocks that will outperform the broader market. And the truth is, you can make significant gains if you buy good quality businesses at the right price. For example, long term Xiamen Zhongchuang Environmental Technology Co., Ltd (SZSE:300056) shareholders have enjoyed a 83% share price rise over the last half decade, well in excess of the market return of around 13% (not including dividends). On the other hand, the more recent gains haven't been so impressive, with shareholders gaining just 58%.

After a strong gain in the past week, it's worth seeing if longer term returns have been driven by improving fundamentals.

Xiamen Zhongchuang Environmental Technology wasn't profitable in the last twelve months, it is unlikely we'll see a strong correlation between its share price and its earnings per share (EPS). Arguably revenue is our next best option. Shareholders of unprofitable companies usually desire strong revenue growth. As you can imagine, fast revenue growth, when maintained, often leads to fast profit growth.

Over the last half decade Xiamen Zhongchuang Environmental Technology's revenue has actually been trending down at about 14% per year. Despite the lack of revenue growth, the stock has returned a respectable 13%, compound, over that time. To us that suggests that there probably isn't a lot of correlation between the past revenue performance and the share price, but a closer look at analyst forecasts and the bottom line may well explain a lot.

The graphic below depicts how earnings and revenue have changed over time (unveil the exact values by clicking on the image).

You can see how its balance sheet has strengthened (or weakened) over time in this free interactive graphic.

A Different Perspective

It's nice to see that Xiamen Zhongchuang Environmental Technology shareholders have received a total shareholder return of 58% over the last year. That gain is better than the annual TSR over five years, which is 13%. Therefore it seems like sentiment around the company has been positive lately. Given the share price momentum remains strong, it might be worth taking a closer look at the stock, lest you miss an opportunity. 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 2 warning signs with Xiamen Zhongchuang Environmental Technology (at least 1 which shouldn't be ignored) , 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.