Generally speaking the aim of active stock picking is to find companies that provide returns that are superior to the market average. Buying under-rated businesses is one path to excess returns. For example, long term Changhong Huayi Compressor Co., Ltd. (SZSE:000404) shareholders have enjoyed a 64% share price rise over the last half decade, well in excess of the market decline of around 7.9% (not including dividends). However, more recent returns haven't been as impressive as that, with the stock returning just 11% in the last year, including dividends.

The past week has proven to be lucrative for Changhong Huayi Compressor investors, so let's see if fundamentals drove the company's five-year performance.

While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just 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.

During five years of share price growth, Changhong Huayi Compressor achieved compound earnings per share (EPS) growth of 48% per year. This EPS growth is higher than the 10% average annual increase in the share price. So it seems the market isn't so enthusiastic about the stock these days. This cautious sentiment is reflected in its (fairly low) P/E ratio of 10.40.

The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).

It is of course excellent to see how Changhong Huayi Compressor has grown profits over the years, but the future is more important for shareholders. This free interactive report on Changhong Huayi Compressor'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). 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 Changhong Huayi Compressor the TSR over the last 5 years was 88%, which is better than the share price return mentioned above. The dividends paid by the company have thusly boosted the total shareholder return.

A Different Perspective

We're pleased to report that Changhong Huayi Compressor shareholders have received a total shareholder return of 11% over one year. That's including the dividend. However, that falls short of the 13% TSR per annum it has made for shareholders, each year, over five years. 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 1 warning sign with Changhong Huayi Compressor , and understanding them should be part of your investment process.

For those who like to find winning investments this free list of undervalued companies with recent insider purchasing, could be just the ticket.

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.